According to EPS-operating income graph, debt financing is preferred if the expected operating income is:
A) less than the break-even income
B) greater then the break-even income
C) equal to the break-even income

Question

Quizplus · Accepted Answer

According to the EPS-operating income graph, the point where the operating income intersects with the indifference point (where EPS is the same for both financing options) is the break-even point. If the expected operating income is greater than the break-even point, debt financing is preferred as it will result in higher EPS. If the expected operating income is less than the break-even point, equity financing is preferred as it will result in a lower financial risk. Therefore, choice B is the best choice as it indicates that debt financing is preferred.

According to EPS-Operating Income Graph, Debt Financing Is Preferred If