Topic 9

Question 1

• The effect of financial leverage depends on the company’s EBIT. When EBIT is relatively high, leverage beneficial.
• Under the expented scenario, leverage increases the returns to shareholders, as measured by __________
• Shareholders are exposed to more risk under the proposed capital structure since the EPS and ROE are much more sensitive to changes in EBIT in this case.

Answer 1

both ROE and EPS

Question 2

M&M proposition I: the pie model

The size of the pie does not ______ on how it is sliced.

Answer 2

depend

Question 3

Even level of EBIT

If earned EBIT _____ Break Even EBIT, go for debt (levrage)

If earned EBIT < Break Even EBIT< dont go for debt

Answer 3

>

Question 4

Break Even EBIT:

Break Even EBIT is that ______ of EBIT, where the EPS of the two capital structures is the same

Answer 4

level