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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...
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