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(3) If a company’s expected EBIT in the coming year is more than the break-even EBIT,...

(3) If a company’s expected EBIT in the coming year is more than the break-even EBIT, then the increase in Debt/Equity ratio may be beneficial to its stockholders. ( )

true or false

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Answer #1

When there is earning before interest and income in the coming year expectations of being higher than the break-even earning before interest and tax, when the increase in debt equity ratio may not be helpful for stockholders because it would be better to issue more debt to increase the Earning per share but With increase in debt capital will lead to increase in financial risk that would increase the required rate of return on capital for shareholders and higher required rate of return can also offset the higher EPS.

The given statement is TRUE because this statement is using "MAY" so it would lead to increase in Earning per share and it may increase the the value of company.

The given statement is TRUE.

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