Unformatted text preview: ital structure, both return
(EPS) and risk (via the required return, ks) must be integrated into a valuation
framework consistent with the capital structure theory presented earlier. Review Question
11–13 Explain the EBIT–EPS approach to capital structure. Include in your
explanation a graph indicating the financial breakeven point; label the
axes. Is this approach consistent with maximization of the owners’ wealth? LG6 Choosing the Optimal Capital Structure
A wealth maximization framework for use in making capital structure decisions
should include the two key factors of return and risk. This section describes the
procedures for linking to market value the return and risk associated with alternative capital structures. Linkage
To determine the firm’s value under alternative capital structures, the firm must
find the level of return that must be earned to compensate owners for the risk
being incurred. Such a framework is consistent with the overall valuation framework developed in Chapters 6 and 7 and applied to capital budgeting decisions in
The required r...
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This document was uploaded on 03/30/2014.
- Spring '14