7 350 300 250 200 maximum share value 2328 2000

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: g Value versus Maximizing EPS Throughout this text, the goal of the financial manager has been specified as maximizing owner wealth, not profit. Although there is some relationship between expected profit and value, there is no reason to believe that profit-maximizing strategies necessarily result in wealth maximization. It is therefore the wealth of the owners as reflected in the estimated share value that should serve as the criterion for selecting the best capital structure. A final look at Cooke Company will highlight this point. EXAMPLE Further analysis of Figure 12.7 clearly shows that although the firm’s profits (EPS) are maximized at a debt ratio of 50%, share value is maximized at a 30% debt ratio. Therefore, the preferred capital structure would be the 30% debt ratio. The two approaches provide different conclusions because EPS maximization does not consider risk. Some Other Important Considerations Because there is really no practical way to calculate the optimal capital structure, any quantitative analysis of capital structure must be tempered with other impo...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online