Question

In an EPS-EBI graphical relationship, the debt ray and equity ray cross. At this point the equity and debt are:
(A) equivalent with respect to EPS but above and below this point equity is always superior.
(B) at breakeven in EPS but above this point debt increases EPS via leverage and decreases EPS below this point.
(C) equal but away from breakeven equity is better as fewer shares are outstanding.
(D) at breakeven and MM Proposition II states that debt is the better choice.

Answer 1

Explanation:

It’s pretty obvious that we should be grateful to the “essential workers” during this time of shelter in

place. Food suppliers, health care workers, delivery people, and first responders have taken on risks to

themselves for the benefit of everyone else. How can we possibly repay them? By showing a little

Answer 2

In an EPS-EBI graphical relationship, the debt ray and equity ray cross. At this point, the equity and debt are equivalent with respect to EPS but above and below this point equity is always superior. (Option A)

• EPS largely depends on a company's earnings and for the EPS calculation, earnings before interest and taxes or shortly EBI is used.
• It is because it reflects the amount of profit that remains after accounting for the expenses which are necessary to keep the business going.
• Moreover, EBI is often referred to as operating income.
• The EBI-EPS analysis gives the best ratio of debt to equity.
• However, businesses can use it to find an optimum balance in their debt and equity financing of their company.
• Thus, The analysis of EBI and EPS shows the effect of the balance sheet's structure on the company's earnings.

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