You are writing a comparison of an all-equity structure to a levered capital structure for a firm.It is accurate to state in this comparison that:
A)earnings per share will always be higher in the all-equity structure.
B)firms will only select the levered structure when individual rates on borrowed funds are lower than corporate rates.
C)leverage lowers shareholders' returns in bad times.
D)the all-equity firm has a greater advantage the higher the firm's earnings before interest.
E)leverage improves shareholders' returns regardless of the firm's level of earnings.

Question

Quizplus · Accepted Answer

This statement is accurate as leverage amplifies both losses and gains for shareholders. In good times, leverage can increase returns for shareholders but in bad times, it can lead to lower or even negative returns, hence lowering shareholders' returns. The other options are not accurate as earnings per share may not always be higher in an all-equity structure, firms may select a levered structure even when individual rates on borrowed funds are higher than corporate rates, the advantage of an all-equity structure is not necessarily linked to the firm's earnings before interest, and leverage does not necessarily improve shareholders' returns regardless of the firm's level of earnings.

You Are Writing a Comparison of an All-Equity Structure to a Levered