QUESTION: The EBIT-EPS approach to capital structure involves selecting the capital structure that maximizes earnings before...

QUESTION: The EBIT-EPS approach to capital structure involves selecting the capital structure that maximizes earnings before interest and taxes (EBIT) over the expected range of earnings per share (EPS). True or False with an explaintion. minimum worrds 200

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Expert Solution

The EBIT-EPS approach to capital structure is a business tool which is used to determine the best ratio between debt and equity which are mostly used to finance the business and comes for the use of operations and business assets.

EBIT ( Earning before interest and taxes) is refers to the company earning before paying interest on debt amd tax on income earned. No matters takes place or not any effect on EBIT if company have more debt and overloaded with debt or no loans at all. The EBIT remains the same.

EPS ( Earning per Share) refers to the profit of the company after paying interest and all types of taxes. EPS basically defines that profit per share.

For example -

An company wants to stable EPS, the company EBIT must also increase the debt interest expense. If EBIT increases the same, then the EPS remains stable assming no changes in taxes.

So,

The EBIT-EPS approach to capital structure involves selecting the capital structure that maximize earning before interest and taxes over the expected range of earnings per share.

jeff jeffy answered 1 year ago

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