When Using an EPS-EBIT Chart to Evaluate a Pure Debt

question 113

Multiple Choice

When using an EPS-EBIT chart to evaluate a pure debt financing and pure equity financing plan, the debt financing plan line will have

• A) a steeper slope than the equity financing plan line.
• B) a slower rate of change as EBIT increases.
• C) a downward slope.
• D) the same slope as the equity plan, but a higher intercept.

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Definitions:

Externalities

Effects of a production or consumption activity on other parties not directly involved in the transaction, which may be either positive or negative.

Neutral Taxes

Taxes that do not affect the allocation of resources between different goods or activities in the economy.

Excess Burdens

The economic inefficiencies or losses that result from imposing taxes or government policies.

Principle of Second Best

An economic theory that suggests when a condition for a perfect market cannot be met, the next-best solution may involve violating another condition to improve efficiency.