In an EPS-Operating Income graphical relationship, the slope of the debt line is steeper than the equity line. The debt line has a negative value for intercept because:
A) The break-even point is higher with debt
B) A fixed interest charge must be paid even at low earnings
C) The amount of interest per share has only a positive effect on the intercept
D) The higher the interest rate the greater the slope

Question

Quizplus · Accepted Answer

The negative value for intercept on the debt line means that even at low earnings, a fixed interest charge must be paid. This is because debt comes with a fixed interest rate that must be paid regardless of the company's earnings. As a result, the break-even point is higher with debt and the slope of the debt line is steeper than the equity line.

In an EPS-Operating Income Graphical Relationship, the Slope of the Debt