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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.
- Spring '14