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:

Months

Units of time, approximately 1/12th of a year, used in calendars to segment time.

Maturity Value

The total amount that will be paid to the investor at the end of a fixed-income investment's life.

Months

Units of time, each roughly equivalent to one twelfth of a year, used in planning and organizing.

Rate Of Interest

The percentage of the principal that will be charged for a particular period of time, normally one year.