This preview shows page 1. Sign up to view the full content.
Unformatted text preview: he standard deviation
of EPS, and the coefficient of variation of EPS associated with each debt ratio.17
Table 12.13 summarizes the pertinent data for the seven alternative capital
structures. The values shown for 0, 30, and 60% debt ratios were developed in
Table 12.12, whereas calculations of similar values for the other debt ratios (10,
20, 40, and 50%) are not shown. Because the coefficient of variation measures
the risk relative to the expected EPS, it is the preferred risk measure for use in
comparing capital structures. As the firm’s financial leverage increases, so does its
coefficient of variation of EPS. As expected, an increasing level of risk is associated with increased levels of financial leverage.
The relative risks of the two extremes of the capital structures evaluated in
Table 12.12 (debt ratios 0% and 60%) can be illustrated by showing the prob- 17. For explanatory convenience, the coefficient of variation of EPS, which measures total (nondiversifiable and
diversifiable) risk, is used throughout...
View Full Document