In an EPS-EBI graphical relationship, the debt ray and equity ray cross.At this point the equity and debt are:
A)equivalent with respect to EPS but above and below this point equity is always superior.
B)at breakeven in EPS but above this point debt increases EPS via leverage and decreases EPS below this
Point.
C)equal but away from breakeven equity is better as fewer shares are outstanding.
D)at breakeven and MM Proposition II states that debt is the better choice.
E)at breakeven and debt is the better choice below breakeven because small payments can be made.

Question

Quizplus · Accepted Answer

At the point where the debt ray and equity ray cross, the EPS is equal for both debt and equity. However, as we move above this point, equity becomes superior as it does not involve any fixed payments like interest on debt. On the other hand, below this point, debt is a better choice because small payments can be made without affecting EPS significantly. This is known as financial leverage. Therefore, Option B is the best choice as it explains the role of debt in increasing EPS via leverage above the breakeven point and decreasing EPS below it.

In an EPS-EBI Graphical Relationship, the Debt Ray and Equity