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

Statement A is correct because if expected earnings are above the indifference point, using debt financing will increase earnings per share (EPS) more than using equity financing. 
Statement B is correct because if expected earnings are below the indifference point, using equity financing will result in a higher EPS than using debt financing. Therefore, both statements A and B are correct.

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