To select the best capital structure both return eps

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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 Chapter 9. The required r...
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This document was uploaded on 03/30/2014.

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