Principles of Managerial Finance, 15th Edition

13.3 EBIT–EPS Approach to Capital Structure

1. LG5

It should be clear from earlier chapters that the goal of the financial manager is to maximize the value of the firm. One of the widely followed variables affecting the firm’s value is its earnings, which represent the returns earned on behalf of owners. Even though focusing exclusively on earnings ignores risk (the other key variable affecting the firm’s stock price), we can gain some useful insights into the merits of alternative capital structures by studying how changing debt levels impact earnings. 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 ...