536 part 4 long term financial decisions presenting a

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: rs’ returns, we consider the relationship between earnings before interest and taxes (EBIT) and earnings per share (EPS). A constant level of EBIT—constant business risk—is assumed, to isolate the effect on returns of the financing costs associated with alternative capital structures. EPS is used to measure the owners’ returns, which are expected to be closely related to share price.20 The Data Required To graph a financing plan, we need to know at least two EBIT–EPS coordinates. The approach for obtaining coordinates can be illustrated by an example. EXAMPLE EBIT–EPS coordinates can be found by assuming specific EBIT values and calculating the EPS associated with them.21 Such calculations for three capital structures—debt ratios of 0, 30, and 60%—for Cooke Company were presented in Table 12.12. For EBIT values of $100,000 and $200,000, the associated EPS values calculated there are summarized in the table within Figure 12.6. Plotting the Data financial breakeven point The level of EBIT necessary to just cover all fixed financial costs; the level o...
View Full Document

Ask a homework question - tutors are online