Question

Green Co. has total assets $400,000, a cost of borrowed funds of 6%, and an EBIT of $42,500. From a financial break-even perspective, Green Co. is:

A. breaking even.
B. lower than the breakeven point.
C. higher than the break-even point.
D. in need of new financing.

Answer 1

Green Co. has an EBIT that is higher than its interest expenses, therefore it is operating above the break-even point. The correct answer is C, higher than the break-even point.

Step-by-step explanation:

The question asks whether Green Co. is breaking even, above, or below the break-even point, given its total assets of $400,000, a cost of borrowed funds at 6%, and an EBIT (Earnings Before Interest and Taxes) of $42,500. To determine the break-even point from a financial perspective, we need to calculate the total interest expense and compare it to the EBIT.

Green Co.'s total interest expense on the borrowed funds is 6% of $400,000, which equals $24,000 ($400,000 * 0.06). The break-even point would occur when EBIT is equal to the interest expense, which is not the case here as EBIT ($42,500) is higher than the interest expense ($24,000). Therefore, Green Co. is operating above the break-even point.

The correct answer to the question is: C. higher than the break-even point.