Assume that you are comparing two firms which are identical,with one exception.Firm A is an all-equity firm and firm B has a debt-equity ratio of 0.60.All else equal,firm A will:
A)generate a higher EBIT,but lower net income than firm B
B)generate a lower EBIT,but higher net income than firm B
C)always have higher EPS than firm B,since it has no interest expense
D)have lower EPS than firm B when the level of earnings before interest and taxes (EBIT)is relatively high
E)have lower EPS than firm B when the level of EBIT is relatively low

Question

Quizplus · Accepted Answer

Firm B, with debt, benefits from the tax shield on interest, which can increase EPS when EBIT is high enough to cover interest expenses.

Assume That You Are Comparing Two Firms Which Are Identical,with