The Primary Weakness of EBIT-EPS Analysis Is That

question 63

Multiple Choice

The primary weakness of EBIT-EPS analysis is that

• A) it ignores the implicit cost of debt financing.
• B) it double counts the cost of debt financing.
• C) it applies only to firms with large amounts of debt in their capital structure.
• D) it may only be used by firms that are profitable this year.

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Definitions:

Paid-In Capital

Funds received from investors in exchange for stock, representing capital contributed to a corporation by its stockholders along with donated surplus.

Treasury Stock

Treasury stock consists of shares that were issued and later reacquired by the issuing corporation, not retired but held for future use.

Total Paid-In Capital

The total amount of capital that a company has received from shareholders in exchange for shares of stock.

Retained Earnings

The portion of net income that is retained by the corporation rather than distributed to its shareholders as dividends.