In an EPS- EBIT graphical relationship, the slope of the debt ray is steeper than the equity ray. The debt ray has a lower intercept because:
A) more shares are outstanding for the same level of EBIT.
B) the break-even point is higher with debt.
C) a fixed interest charge must be paid even at low earnings.
D) the amount of interest per share has only a positive effect on the intercept.
E) the higher the interest rate the greater the slope.

Question

Quizplus · Accepted Answer

The debt ray has a lower intercept because a fixed interest charge must be paid even at low earnings, which reduces the earnings available to shareholders at all levels of EBIT compared to a situation with no debt.

In an EPS- EBIT Graphical Relationship, the Slope of the Debt