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Unformatted text preview: est and taxes (EBIT). The EBIT–EPS Approach to Capital Structure 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). Presenting a Financing Plan Graphically To analyze the effects of a firm’s capital structure on the owners’ returns, we consider the relationship between earnings before interest and taxes (EBIT) and earnings per share (EPS). A constant level of EBIT—constant business risk—is 444 PART 4 Long-Term Financial Decisions assumed, to isolate the effect on returns of the financing costs associated with alternative capital structures. EPS is used to measure the owners’ returns, which are expected to be closely related to share price. The Data Required To graph a financing plan, we need...
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This document was uploaded on 03/30/2014.

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