529 530 part 4 long term financial decisions table

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Unformatted text preview: [(2) (1)] (3) $2.40 $1.70 0.71 10 2.55 1.88 0.74 20 2.72 2.13 0.78 30 2.91 2.42 0.83 40 3.12 2.83 0.91 50 3.18 3.39 1.07 60 3.03 4.24 1.40 Capital structure debt ratio 0% ability distribution of EPS associated with each of them. Figure 12.3 shows these two distributions. The expected level of EPS increases with increasing financial leverage, and so does risk, as reflected in the relative dispersion of each of the distributions. Clearly, the uncertainty of the expected EPS, as well as the chance of experiencing negative EPS, is greater when higher degrees of financial leverage are employed. Further, the nature of the risk–return tradeoff associated with the seven capital structures under consideration can be clearly observed by plotting the FIGURE 12.3 Probability Density Probability Distributions Probability distributions of EPS for debt ratios of 0% and 60% for Cooke Company Debt Ratio = 0% Debt Ratio = 60% –4 –3 –2 –1 0 1 2 3 2.40 3.03 EPS ($) 4 5 6 7 8 9 Expected EPS and Coefficient of Variation of EPS Expected EPS and co...
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