When using an EPS-EBIT chart to evaluate a pure debt financing and pure equity financing plan, the debt financing plan line will have
A) a steeper slope than the equity financing plan line.
B) a slower rate of change as EBIT increases.
C) a downward slope.
D) the same slope as the equity plan, but a higher intercept.

Question

Quizplus · Accepted Answer

The EPS-EBIT chart shows the relationship between Earnings per Share (EPS) and Earnings Before Interest and Taxes (EBIT) for different levels of financing. A pure debt financing plan will have a steeper slope than a pure equity financing plan since interest expense reduces the net income available to common shareholders, resulting in a greater impact on EPS for changes in EBIT. Therefore, option A is the correct answer.

When Using an EPS-EBIT Chart to Evaluate a Pure Debt