When using an EPS-EBIT chart to evaluate a pure debt financing and pure equity financing plan,
A) the debt financing plan line will graph with a steeper slope than the equity financing plan line.
B) the debt financing plan line will have a lower level of EBIT at EPS = 0.
C) the line of the two financing plans will intersect on the EBIT axis.
D) the slope of the equity financing plan line will be steeper than the debt financing plan line below the intersection of the two lines.

Question

Quizplus · Accepted Answer

A pure debt financing plan will result in a higher financial leverage, leading to a steeper slope on the EPS-EBIT chart compared to a pure equity financing plan. This means that the debt financing plan line will graph with a steeper slope than the equity financing plan line.

When Using an EPS-EBIT Chart to Evaluate a Pure Debt