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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...
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This document was uploaded on 01/19/2014.

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