67 100000 15000 and for the 60 debt case it is 202

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Unformatted text preview: or the 60% debt case, it is 2.02 ($100,000 $49,500). Because lower times interest earned ratios reflect higher risk, these ratios support the conclusion that the risk of the capital structures increases with increasing financial leverage. The capital structure for a debt ratio of 60% is riskier than that for a debt ratio of 30%, which in turn is riskier than the capital structure for a debt ratio of 0%. The Basic Shortcoming of EBIT–EPS Analysis The most important point to recognize when using EBIT–EPS analysis is that this technique tends to concentrate on maximizing earnings rather than maximizing owner wealth. The use of an EPS-maximizing approach generally ignores risk. If investors did not require risk premiums (additional returns) as the firm increased the proportion of debt in its capital structure, a strategy involving maximizing EPS would also maximize owner wealth. But because risk premiums increase with increases in financial leverage, the maximization of EPS does not ensure owner wealth maximization. To select the best cap...
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This document was uploaded on 03/30/2014.

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