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Benefits of Debentures

If a firm has...

Question

If a firm has no preference share capital, financial break-even level is defined as equal to ___________.

A

EBIT

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B

Interest liability

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C

Equity dividend

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D

Tax liability

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Solution

The correct option is B Interest liability
Financial break even is a level of profit which covers all the fixed financial charges.It is the level of EBIT where the EPS of the company is zero. The higher is the level, higher is the financial risk for equity shareholders.
if there is no preference share, the company is having only fixed financial cost of interest on debt.

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