Final answer:
Green Co.'s EBIT of $42,500 is greater than its annual financial charges of $24,000 (calculated as 6% of total assets), thus it is higher than the financial break-even point. Option C is correct answer.
Step-by-step explanation:
To determine if Green Co. is breaking even from a financial perspective, we need to calculate the financial break-even point, which is the level of Earnings Before Interest and Taxes (EBIT) that will cover the cost of the company's borrowed funds.
Green Co. has total assets of $400,000 and a cost of borrowed funds of 6%. The cost of the borrowed funds can be calculated by multiplying the total assets by the cost of borrowing, which in this case is 6%. Therefore, the annual financial charges are $400,000 * 6% = $24,000.
The EBIT of Green Co. is $42,500. To check if the company is at, above, or below the break-even point, we compare the EBIT to the annual financial charges. Since the EBIT ($42,500) is greater than the annual financial charges ($24,000), Green Co. is earning more than it needs to cover the cost of its borrowed funds. Therefore, Green Co. is higher than the break-even point, which indicates that it is financially breaking even and has additional earnings to potentially cover other costs or investments.
The correct answer to the student's question is C. higher than the break-even point.