When Comparing Levered Vs

question 84

Multiple Choice

When comparing levered vs. unlevered capital structures,leverage works to increase EPS for high levels of EBIT because:

• A) interest payments on the debt vary with EBIT levels.
• B) interest payments on the debt stay fixed, leaving less income to be distributed over less shares.
• C) interest payments on the debt stay fixed, leaving more income to be distributed over less shares.
• D) interest payments on the debt stay fixed, leaving less income to be distributed over more shares.
• E) interest payments on the debt stay fixed, leaving more income to be distributed over more shares.

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Definitions:

Direct Labour

The labor costs directly attributable to the production of goods or services, typically including wages of workers who are physically involved in creation of the product.

Variable Overhead

Expenses that fluctuate with changes in production volume, such as utilities or materials used in the manufacturing process.

Fixed Overhead

Fixed costs that do not vary with the volume of production, such as rent, salaries, and insurance.

Variable Selling

Costs that vary in direct proportion to the volume of sales, such as commissions or shipping fees.