Which of the following statements is CORRECT?
A) The "break point" as discussed in the text refers to the point where the firm's tax rate increases.
B) The "break point" as discussed in the text refers to the point where the firm has raised so much capital that it is simply unable to borrow any more money.
C) The "break point" as discussed in the text refers to the point where the firm is taking on investments that are so risky the firm is in serious danger of going bankrupt if things do not go exactly as planned.
D) The "break point" as discussed in the text refers to the point where the firm has raised so much capital that it has exhausted its supply of additions to retained earnings and thus must raise equity by issuing stock.
E) The "break point" as discussed in the text refers to the point where the firm has exhausted its supply of additions to retained earnings and thus must begin to finance with preferred stock.

Question

Quizplus · Accepted Answer

The "break point" refers to the point where the firm has raised so much capital that it has exhausted its supply of additions to retained earnings and thus must raise equity by issuing stock. This is also known as the point of financial leverage, where the cost of equity is higher than the cost of debt, and the firm is at risk of financial distress or bankruptcy.

Which of the Following Statements Is CORRECT