In considering EBIT-EPS analysis, which of the following statements is/are correct?
A)If the expected earnings are above the indifference point, the debt option is preferred.
B) If the expected earnings are below the indifference point, the equity option is preferred.
C)Both statements a and b are correct.
D)Neither statement a nor b is correct.

Question

Quizplus · Accepted Answer

EBIT-EPS analysis helps in determining the best financing mix for a company. If the expected earnings are above the indifference point, it means the company can easily cover its fixed interest costs, and hence the debt option is preferred. On the other hand, if the expected earnings are below the indifference point, it means the company will find it difficult to cover fixed interest costs, and hence the equity option is preferred. Therefore, both statements A and B are correct.

In Considering EBIT-EPS Analysis, Which of the Following Statements Is/are