This preview shows page 1. Sign up to view the full content.
Unformatted text preview: ighted average cost
of capital (WACC) behave as the firm’s financial leverage increases from
zero? Where is the optimal capital structure? What is its relationship to
the firm’s value at that point? LG5 12.3 The EBIT–EPS Approach to Capital Structure EBIT–EPS approach
An approach for selecting the
capital structure that maximizes
earnings per share (EPS) over the
expected range of earnings
before interest and taxes (EBIT). One of the key variables affecting the market value of the firm’s shares is its
return to owners, as reflected by the firm’s earnings. Therefore, earnings per
share (EPS) can be conveniently used to analyze alternative capital structures.
The EBIT–EPS approach to capital structure involves selecting the capital structure that maximizes EPS over the expected range of earnings before interest and
taxes (EBIT). 536 PART 4 Long-Term Financial Decisions Presenting a Financing Plan Graphically
To analyze the effects of a firm’s capital structure on the owne...
View Full Document