Jageman Athletic Apparel has a debt-equity ratio of.4 and earnings before interest and taxes (EBIT) of $265,000. The break-even level of EBIT is $338,000. Based on this information, you know the:
A) Firm should increase its debt-equity ratio.
B) Firm is operating at its optimal level.
C) Firm has minimized its weighted average cost of capital.
D) Firm would be more profitable if it lowered its level of output.
E) Debt of the firm is a disadvantage.

Question

Quizplus · Accepted Answer

The break-even level of EBIT ($338,000) is higher than the current EBIT ($265,000), indicating that the firm is not covering its fixed costs, including interest on debt. This suggests that the firm's debt is a disadvantage because it increases the firm's fixed costs, making it harder to break even.

Jageman Athletic Apparel Has a Debt-Equity Ratio Of