Consider two companies that operate in the same line of business and have the same degree of

Question:

Consider two companies that operate in the same line of business and have the same degree of operating leverage: the Basic Company and the Grundlegend Company. The Basic Company has no debt in its but the Grundlegend Company has a that consists of 50 percent debt. Which of the following statements is true?
a. The Grundlegend Company has a degree of total leverage that exceeds that of the Basic Company by 50 percent.
b. The Grundlegend Company has the same sensitivity of net earnings to changes in earnings before interest and taxes as the Basic Company.
c. The Grundlegend Company has the same sensitivity of earnings before interest and taxes to changes in sales as the Basic Company.
d. The Grundlegend Company has the same sensitivity of net earnings to changes in sales as the Basic Company.

Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a...