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Flashcards in Topic 9 Deck (4)
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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.

both ROE and EPS

2

M&M proposition I: the pie model

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

depend

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

>

4

Break Even EBIT:

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

level