Answered: You are comparing two possible capital…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

You are comparing two possible capital structures for a firm. The first option is an all-equity firm. The second option involves the use of $3.8 million of debt. The break-even point between these two financing options occurs when earnings before interest and taxes (EBIT) are $428,000. Given this, you know that leverage is beneficial to the firm:

A- whenever EBIT exceeds $428,000

B- whenever EBIT is less than $428,000

C- only when EBIT is $428,000

D- only if the debt is decreased by $428,000

E- only is the debt is increased by $428,000

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