You have computed the break-even point between a levered and an unlevered capital structure.Assume there are no taxes.At the break-even level,the:
A)firm is just earning enough to pay for the cost of the debt.
B)firm's earnings before interest and taxes are equal to zero.
C)earnings per share for the levered option are exactly double those of the unlevered option.
D)advantages of leverage exceed the disadvantages of leverage.
E)firm has a debt-equity ratio of .50.

Question

Quizplus · Accepted Answer

At the break-even level between a levered and an unlevered capital structure (assuming no taxes), the firm is just earning enough to cover the cost of the debt. This means that the earnings before interest and taxes (EBIT) are sufficient to pay the interest on the debt, making leverage neutral in terms of its impact on the firm's value.

You Have Computed the Break-Even Point Between a Levered and an Unlevered