When using an EPS-EBIT chart to evaluate a pure debt financingand pure equity fi

Question

When using an EPS-EBIT chart to evaluate a pure debt financingand pure equity financing plan:
a. the debt financing plan line will graph with a steeperslope than the equity financing plan line b. the debt financing plan line will have a lower level ofEBIT at EPS = 0 c. the line of the two financing plans will intersect on theEBIT axis d. the slope of the equity financing plan line will be steeperthan the debt financing plan line below the intersection of the twolines When using an EPS-EBIT chart to evaluate a pure debt financingand pure equity financing plan:
a. the debt financing plan line will graph with a steeperslope than the equity financing plan line b. the debt financing plan line will have a lower level ofEBIT at EPS = 0 c. the line of the two financing plans will intersect on theEBIT axis d. the slope of the equity financing plan line will be steeperthan the debt financing plan line below the intersection of the twolines

Explanation / Answer

Answer: a. the debt financing plan line will graph with a steeper slopethan the equity financing plan line This is since using equity involves a smaller amount of leverage,the slope of the equity line will always be less steep.

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