Question

Regarding the effect of financial leverage and the firm's operating earnings (EBIT), which statement is true?

a. Financial leverage increases the slope of the EPS line.
b. The rate of return on assets is unaffected by leverage.
c. Below the indifference or break-even point in EBIT, an unlevered capital structure is best.
d. None of the above.

Answer 1

The correct statement regarding the effect of financial leverage and the firm's operating earnings (EBIT) is 'None of the above.'

Step-by-step explanation:

The correct statement regarding the effect of financial leverage and the firm's operating earnings (EBIT) is d. None of the above.

Financial leverage refers to the use of borrowed money to finance a firm's operations. It involves taking on debt in order to increase the potential return on investment.

However, the effect of financial leverage on the firm's operating earnings (EBIT) and EPS (Earnings Per Share) depends on several factors, such as the interest rate on debt and the riskiness of the firm's operations.

None of the statements a, b, or c accurately represent the relationship between financial leverage and the firm's operating earnings (EBIT).