6 plotting the data financial breakeven point the

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Unformatted text preview: f EBIT for which EPS $0. The Cooke Company data can be plotted on a set of EBIT–EPS axes, as shown in Figure 12.6. The figure shows the level of EPS expected for each level of EBIT. For levels of EBIT below the x-axis intercept, a loss (negative EPS) results. Each of the x-axis intercepts is a financial breakeven point, the level of EBIT necessary to just cover all fixed financial costs (EPS $0). Comparing Alternative Capital Structures We can compare alternative capital structures by graphing financing plans as shown in Figure 12.6. EXAMPLE Cooke Company’s capital structure alternatives were plotted on the EBIT–EPS axes in Figure 12.6. This figure shows that each capital structure is superior to the others in terms of maximizing EPS over certain ranges of EBIT. The zeroleverage capital structure (debt ratio 0%) is superior to either of the other capi- 20. The relationship that is expected to exist between EPS and owner wealth is not one of cause and effect. As indicated in Chapter 1, the maximization of profits does not necessarily ensure that owners’ wealth is also being max...
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