In an EPS-EBI graphical relationship,the debt ray and equity ray cross. At this point the equity and debt are:
A) equivalent with respect to EPS but above and below this point equity is always superior.
B) at breakeven in EPS but above this point debt increases EPS via leverage and decreases EPS below this point.
C) equal but away from breakeven equity is better as fewer shares are outstanding.
D) at breakeven and MM Proposition II states that debt is the better choice.
E) at breakeven and debt is the better choice below breakeven because small payments can be madE.

Question

Quizplus · Accepted Answer

At the point where the debt ray and equity ray cross, the EPS is at breakeven. Above this point, debt increases EPS through leverage and below this point, debt decreases EPS. Therefore, the best choice would be to use debt if the EPS is expected to be above the breakeven point, and use equity if the EPS is expected to be below the breakeven point.

In an EPS-EBI Graphical Relationship,the Debt Ray and Equity Ray