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EPS $0. The two EBIT–EPS coordinates developed for JSG Company’s current zero-leverage (debt ratio 0 percent) situation can be plotted on a set of EBIT–EPS axes, as
shown in Figure 11.4. The figure shows the level of EPS expected for each level of
EBIT. For levels of EBIT below the x-axis intercept, a loss (negative EPS) results.
Each of the x-axis intercepts is a financial breakeven point, the level of EBIT necessary to just cover all fixed financial costs (EPS $0). Comparing Alternative
We can compare alternative capital structures by graphing financing plans, as
shown in Figure 11.4. The following example illustrates this procedure.
EXAMPLE JSG Company, whose current zero-leverage capital structure was described in the
preceding example, is contemplating shifting its capital structure to either of two
leveraged positions. To maintain its $500,000 of total capital, JSG’s capital
structure will be shifted to greater leverage by issuing debt and using the proceeds to retire an equiva...
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This document was uploaded on 03/30/2014.
- Spring '14