Based on the attached EPS profiles for debt and equity financing alternatives, s

Question

Based on the attached EPS profiles for debt and equity financing alternatives, select the incorrect statement.

A. The red line (A) represents the EPS profile for different levels of sales under the bond financing alternative.

B. The blue line (B) is less steep than the red line (A) indicating that this particular financing option involves less (financial) leverage.

C. At the level of $582 both alternatives have the same EPS ($1.82), so the combination option (i.e., a 50-50 mix of A and B) is better than either A or B.

D. Since Blair expects to sell substantially more than $582 next year, it should go with the alternative with a greater leverage.

Explanation / Answer

C. At the level of $582 both alternatives have the same EPS ($1.82), so the combination option (i.e., a 50-50 mix of A and B) is better than either A or B.

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