In an EPS-operating income graphical relationship,the slope of the debt line is steeper than the equity line.The debt line has a negative intercept because:
A)the break-even point is higher with debt.
B)a fixed interest charge must be paid even at low earnings.
C)the amount of interest per share has only a positive effect on the intercept.
D)the higher the interest rate,the greater the slope.

Question

Quizplus · Accepted Answer

The debt line has a negative intercept because a fixed interest charge must be paid even at low earnings. This means that regardless of the level of earnings, the company still has to pay its debt obligations, which reduces the amount available to shareholders as EPS. As a result, the break-even point is higher with debt, and the intercept of the debt line is negative.

In an EPS-Operating Income Graphical Relationship,the Slope of the Debt