You are writing a comparison of an all-equity structure to a levered capital structure for a firm.It is accurate to state in this comparison that
A)earnings per share will always be higher in the all-equity structure.
B)firms will only select the levered structure when individual rates on borrowed funds are lower than corporate rates.
C)leverage lowers shareholders' returns in bad financial times.
D)the all-equity firm has a greater advantage the higher the firm's earnings before interest.
E)leverage improves shareholders' returns regardless of the firm's level of earnings.

Question

Quizplus · Accepted Answer

It is not accurate to state that earnings per share will always be higher in the all-equity structure, nor is it a requirement for firms to only select the levered structure when individual rates on borrowed funds are lower than corporate rates. However, it is accurate to state that leverage lowers shareholders' returns in bad financial times, as the interest expense on debt must still be paid even if the firm's earnings are low. The statement that the all-equity firm has a greater advantage the higher the firm's earnings before interest is not necessarily true, as the advantage of leverage depends on many factors. Finally, it is also not accurate to state that leverage improves shareholders' returns regardless of the firm's level of earnings.

You Are Writing a Comparison of an All-Equity Structure to a Levered