Which one of the following statements is correct concerning the relationship between a levered and an unlevered capital structure? Ignore 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 because both levered and unlevered firms will have the same cost of capital. This is because, ignoring taxes, the benefits of debt (such as interest tax shields) do not apply, making the cost of capital for both types of firms equal at the break-even point.

Which One of the Following Statements Is Correct Concerning the Relationship