In an EPS-operating income graph, such as Figure 17.1, the slope of the line is steeper when the debt ratio is higher.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 negative intercept on the debt line indicates that even at low earnings, a fixed interest charge must be paid. This means that a higher debt ratio leads to a greater burden of fixed interest charges, which can result in reduced earnings and a lower operating income. Therefore, the slope of the line is steeper when the debt ratio is higher. The other choices are not valid explanations for the negative intercept on the debt line.

In an EPS-Operating Income Graph, Such as Figure 17