In an EPS- EBIT Graphical Relationship, the Slope of the Debt

question 2

Multiple Choice

In an EPS- EBIT graphical relationship, the slope of the debt ray is steeper than the equity ray. The debt ray has a lower intercept because:

• A) more shares are outstanding for the same level of EBIT.
• B) the break-even point is higher with debt.
• C) a fixed interest charge must be paid even at low earnings.
• D) the amount of interest per share has only a positive effect on the intercept.
• E) the higher the interest rate the greater the slope.

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Definitions:

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