Which one of the following statements is correct concerning the relationship between a levered and an unlevered capital structure? Assume there are no taxes.
A)At the break-even point, there is no advantage to debt.
B)The earnings per share will equal zero when EBIT is zero for a levered firm.
C)The advantages of leverage are inversely related to the level of EBIT.
D)The use of leverage at any level of EBIT increases the EPS.
E)EPS are more sensitive to changes in EBIT when a firm is unlevered.

Question

Quizplus · Accepted Answer

At the break-even point, there is no advantage to debt as both levered and unlevered capital structure will have the same EPS. In fact, leverage becomes advantageous only when the EBIT is higher than the break-even point.

Which One of the Following Statements Is Correct Concerning the Relationship