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Unformatted text preview: imized. Nevertheless, it is expected that the movement of earnings per share will have some effect on owners’ wealth,
because EPS data constitute one of the few pieces of information investors receive, and they often bid the firm’s
share price up or down in response to the level of these earnings.
21. A convenient method for finding one EBIT–EPS coordinate is to calculate the financial breakeven point, the level
of EBIT for which the firm’s EPS just equals $0. It is the level of EBIT needed just to cover all fixed financial costs—
annual interest (I) and preferred stock dividends (PD). The equation for the financial breakeven point is
Financial breakeven point
where T is the tax rate. It can be seen that when PD
interest payment. I PD
1T $0, the financial breakeven point is equal to I, the annual CHAPTER 12 Leverage and Capital Structure 537 FIGURE 12.6 EPS ($) EBIT–EPS Approach
A comparison of selected
capital structures for Cooke
Company (data from Table
Ratio 60% 30%
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