In an EPS-EBI graphical relationship, the slope of the debt ray is steeper than the equity ray.The debt ray has a lower intercept because:
A)more shares are outstanding for the same level of EBI.
B)the break-even point is higher with debt.
C)a fixed interest charge must be paid even at low earnings.
D)the amount of interest per share has only a positive effect on the intercept.
E)the higher the interest rate the greater the slope.

Question

Quizplus · Accepted Answer

The debt ray has a lower intercept because a fixed interest charge must be paid even at low earnings, whereas equity does not have a fixed charge. This means that even if earnings are low or negative, the company still has to make its interest payments on the debt, reducing the amount of net income available to equity shareholders.

In an EPS-EBI Graphical Relationship, the Slope of the Debt