Leverage becomes a disadvantage to a firm as soon as the firm's earnings before interest:
A)become negative.
B)exceed the break-even point.
C)are taxed.
D)exceed the firm's unlevered earnings.
E)fall below the break-even point.

Question

Quizplus · Accepted Answer

Leverage (using debt to finance operations) can increase a firm's profits when earnings before interest and taxes (EBIT) are high. However, once EBIT falls below the break-even point, the higher interest expenses from leverage become a significant burden on the firm's financials, potentially leading to bankruptcy or financial distress. Therefore, leverage becomes a disadvantage to a firm when EBIT falls below the break-even point.

Leverage Becomes a Disadvantage to a Firm as Soon as the Firm's