You are comparing two possible capital structures for a firm.The first option is an all-equity firm.The second option involves the use of $3.8 million of debt.The break-even point between these two financing options occurs when the earnings before interest and taxes (EBIT) are $428,000.Given this, you know that leverage is beneficial to the firm:
A)whenever EBIT is less than $428,000.
B)only when EBIT is $428,000.
C)whenever EBIT exceeds $428,000.
D)only if the debt is decreased by $428,000.
E)only if the debt is increased by $428,000.

Question

Quizplus · Accepted Answer

Leverage is beneficial when EBIT exceeds the break-even point of $428,000, as it means the firm can cover the interest on the debt and still have a higher return on equity compared to an all-equity structure.

You Are Comparing Two Possible Capital Structures for a Firm