20 - Why would a project that reaches the break-even point...

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Why would a project that reaches the break-even point in terms of net income potentially be bad for shareholders? The EBIT-EPS capital structure approach focuses on finding a capital structure with the highest EPS (earnings per share) over the expected range of EBIT (earnings before interest and taxes). The reason why we are interested in finding a capital structure, which will permit maximization of the EPS over the expected range of EBIT, is because it partially helps us to achieve the ultimate objective of the enterprise. The ultimate objective of the enterprise is to maximize shareholders’ wealth by maximizing its stock price. Two key variables that affect stock price are return (earnings attributed to owners of the enterprise) and risk (which can be measured by required return) (Dayananda, et al.,2002). When firms make investments, they do so with the objective of making a profit. But another objective that sometimes enters the decision process is avoiding losses. Managers often want to
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This note was uploaded on 10/15/2011 for the course FIN 550 taught by Professor Smith during the Spring '11 term at Berklee.

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20 - Why would a project that reaches the break-even point...

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