In the EBIT-EPS analysis of a company, the situation in which the company uses no debt at all in its capital is described as a(n) ______.
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → unlevered business
Option (1) levered business — Incorrect. A business is levered when it uses debt in its capital. Here there is no debt.
Option (2) business trading on equity — Incorrect. Trading on equity means using more of cheaper debt to raise the EPS. It cannot happen without debt.
Option (3) business with unfavourable financial leverage — Incorrect. Leverage is unfavourable when a firm uses debt and its return on investment is lower than the cost of debt. With no debt there is no leverage at all.
Option (4) unlevered business — Correct. Financial leverage is the share of debt in the total capital. A company with no debt has no leverage, so it is called an unlevered business.
NCERT (2026-27 Edition): “Capital Structure … The proportion of debt in the overall capital is also called financial leverage. …” “EBIT-EPS Analysis … Three situations are considered. There is no debt in situation-I i.e. (unlevered business). Debt of Rs. 10 lakh and 20 lakh are assumed in situations-II and III, respectively. All debt is at 10% p.a. The company earns Rs. 0.93 per share if it is unlevered. …” |