You have computed the break-even point between a levered and an unlevered capital structure. Ignore taxes. At the break-even level, the:
A) company is earning just enough to pay for the cost of the debt.
B) company'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) company has a debt-equity ratio of .50.

Question

Quizplus · Accepted Answer

At the break-even level between a levered and an unlevered capital structure, the company is earning just enough to cover the cost of the debt. This means that the benefits of taking on debt (leverage) exactly offset the costs associated with it, such as interest payments.

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