In an EPS-EBI graphical relationship,why does the debt line have a lower vertical intercept point than the no debt line?
A)The debt line has a negative slope while the no debt line has a positive slope.
B)The break-even point is higher with debt.
C)The debt line is horizontal while the no debt line has a positive slope.
D)With debt,a fixed interest charge is paid out of earnings.
E)The debt line has less of a slope than the no debt line.

Question

Quizplus · Accepted Answer

When a company takes on debt, it has to pay a fixed interest charge out of its earnings. This reduces the amount of earnings that can be distributed as dividends or reinvested in the company. As a result, the vertical intercept point of the debt line is lower than that of the no debt line, indicating that the level of earnings available to shareholders is lower when debt is present.

In an EPS-EBI Graphical Relationship,why Does the Debt Line Have