An EPS-operating income graph, such as Figure 17.1, shows the
A)greater risk associated with debt financing, which is evidenced by a greater slope.
B)the break-even point where EPS of two different debt ratios are equal.
C)the minimum operating income needed to pay the interest for a given level of debt.
D)greater risk associated with debt financing, which is evidenced by a greater slope, the break-even point where EPS of two different debt ratios are equal, and the minimum operating income needed to pay the interest for a given level of debt.

Question

Quizplus · Accepted Answer

An EPS-operating income graph shows all of the options listed in choice D. It illustrates the relationship between earnings per share (EPS) and operating income at different levels of debt financing. The slope of the graph indicates the greater risk associated with debt financing, and the intersection point of the two debt ratios shows the break-even point, where EPS is equal for the two different debt ratios. Additionally, the graph can show the minimum operating income needed to cover the interest payments on a given level of debt.

An EPS-Operating Income Graph, Such as Figure 17