You are comparing two financial policies.The first is all equity.The second involves the use of $2 million of debt.The break-even point between these two policies occurs when the earnings before interest and taxes (EBIT)is $450 000.Given this,it is accurate to say that leverage _____ beneficial to the firm when EBIT is $325 000 and _____ beneficial when EBIT is $625 000.
A)is not;is
B)is not;is not
C)is;is not
D)The answer cannot be determined based on the information provided.
E)is;is

Question

Quizplus · Accepted Answer

Leverage is beneficial when EBIT is above the break-even point of $450,000. At $325,000, EBIT is below the break-even point, so leverage is not beneficial. At $625,000, EBIT is above the break-even point, so leverage is beneficial.

You Are Comparing Two Financial Policies