Question

which of the following statements are true regarding the effect of financial leverage and the firm's operating earnings (ebit)? multiple choice question. the rate of return on assets is unaffected by leverage. the slope of the eps line is unaffected by financial leverage. financial leverage decreases the slope of the eps line. below the ebit break-even point, the levered capital structure is best.

Answer 1

The statements that are true regarding the effect of financial leverage on a firm's operating earnings (EBIT) are: the rate of return on assets is unaffected by leverage, the slope of the EPS line is unaffected by financial leverage, and below the EBIT break-even point, the levered capital structure is best.

Step-by-step explanation:

The correct statements regarding the effect of financial leverage and the firm's operating earnings (EBIT) are:

1. The rate of return on assets is unaffected by leverage.
2. The slope of the EPS line is unaffected by financial leverage.
3. Below the EBIT break-even point, the levered capital structure is best.

Financial leverage refers to the use of debt to finance a firm's operations. It can impact a company's profitability and risk. However, it does not affect the rate of return on assets or the slope of the earnings per share (EPS) line.

Below the EBIT break-even point, a levered capital structure is generally preferred as it allows the firm to benefit from the financial leverage effect, where a higher proportion of fixed costs can magnify the impact of a small increase in sales on operating earnings.