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Unformatted text preview: aphically, this approach reflects risk in terms of
the financial breakeven point and the slope of the
capital structure line. The major shortcoming of
EBIT–EPS analysis is that it concentrates on maximizing earnings rather than owners’ wealth.
LG5 Review the return and risk of alternative capital structures, their linkage to market value,
and other important considerations related to capital structure. The best capital structure can be selected by using a valuation model to link return
and risk factors. The preferred capital structure is
the one that results in the highest estimated share
value, not the highest EPS. Other important nonquantitative factors, such as revenue stability, cash
flow, contractual obligations, management preferences, control, external risk assessment, and timing,
must also be considered when making capital structure decisions.
LG6 (Solutions in Appendix B)
Breakeven point and all forms of leverage TOR most recently sold 100,000
units at $7.50 each; its variable operating...
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