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The two approaches provide different conclusions

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Unformatted text preview: ide different conclusions because EPS maximization does not consider risk. Estimated Share Value ($) Estimating Value Estimated share value and EPS for alternative capital structures for JSG Company 25.00 EPS ($) FIGURE 11.6 3.50 3.00 2.50 2.00 Maximum Share Value = $23.28 20.00 Estimated Share Value 15.00 Maximum EPS = $3.18 0 EPS 10 20 30 40 50 Maximum Maximum Share Value EPS Debt Ratio (%) 60 70 CHAPTER 11 Leverage and Capital Structure 451 Some Other Important Considerations Because there is really no practical way to calculate the optimal capital structure, any quantitative analysis of capital structure must be tempered with other important considerations. Some of the more important additional factors involved in capital structure decisions are summarized in Table 11.11. TABLE 11.11 Important Factors to Consider in Making Capital Structure Decisions Concern Factor Description Business risk Revenue stability Firms that have stable and predictable revenues can more safely undertake highly leveraged capital structures than can firms with volatile patterns of sales revenue. Firms with growing sales tend to benefit from added...
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