You are comparing two possible capital structures for a firm. The first option i

Question

You are comparing two possible capital structures for a firm. The first option is an all-equity firm. The second option involves the use of $3.8 million of debt. The break-even point between these two financing options occurs when the earnings before interest and taxes (EBIT) are $428,000. Given this, you know that leverage is beneficial to the firm:

only when EBIT is $428,000. whenever EBIT is less than $428,000. only if the debt is decreased by $428,000. whenever EBIT exceeds $428,000. only if the debt is increased by $428,000.

Explanation / Answer

correct answer is

whenever EBIT exceeds $428,000.

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