Disadvantage to firm as soon as firm earnings

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Reference no: EM131553937

1. Leverage becomes a disadvantage to a firm as soon as the firm's earnings before interest:

a. become negative.

b. exceed the break-even point.

c. are taxed.

d. exceed the firm's unlevered earnings.

e. fall below the break-even point.

2. An all equity firm has a cost of capital of 15 percent. The firm is considering switching to a debt-equity ratio of .65 with a pretax cost of debt of 7.5 percent. What will the firm's cost of equity be if the firm makes the switch? Ignore taxes.

11.25%

12.21%

16.67%

19.88%

21.38%

Reference no: EM131553937

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