In an EPS-EBI graphical relationship,the debt ray and equity ray cross.At this point the equity and debt are:
A)equivalent with respect to EPS but above and below this point equity is always superior.
B)at breakeven and MM Proposition II states that debt is the better choice.
C)equal but away from breakeven equity is better as fewer shares are outstanding.
D)at breakeven in EPS but above this point debt increases EPS via leverage and decreases EPS below this point.
E)at breakeven and debt is the better choice below breakeven because small payments can be made.

Question

Quizplus · Accepted Answer

At the point where the debt ray and equity ray cross, the EPS is at its breakeven point. Above this point, equity is always superior, while below it, debt increases EPS via leverage and decreases EPS. Therefore, the best choice would be to use debt financing below the breakeven point and equity financing above it.

In an EPS-EBI Graphical Relationship,the Debt Ray and Equity Ray