The Effect of Financial Leverage Depends on the Operating Earnings

question 1

Multiple Choice

The effect of financial leverage depends on the operating earnings of the company. Which if the following is not true?

• A) Below the indifference or break-even point in EBIT the non-levered structure is superior.
• B) Financial leverage increases the slope of the EPS line.
• C) Above the indifference or break-even point the increase in EPS for all equity plans is less than debt-equity plans.
• D) Above the indifference or break-even point the increase in EPS for all equity plans is greater than debt-equity plans.
• E) The rate of return on operating assets is unaffected by leverage.

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Definitions:

Accounts Payable

Short-term liabilities of a company, representing amounts owed to creditors for goods or services received.

Accounts Receivable

Funds that customers owe to a business for goods or services that have been provided but remain unpaid.

Owner's Equity

The residual interest in the assets of the entity after deducting liabilities, representing the ownership interest in the company.

Cash Payments Journal

A financial journal that records all cash payments made by a business, including expenses, purchases, and debt payments.