The Basic Shortcoming of the EBIT-EPS Approach to Capital Structure

question 70

Multiple Choice

The basic shortcoming of the EBIT-EPS approach to capital structure is ________.

• A) that the optimal capital structure is difficult to compute
• B) its disregard for the presence of preferred stock in the capital structure
• C) its disregard for the firm's dividend policy
• D) that it concentrates on the maximization of EPS rather than the maximization of owner's wealth

---

Definitions:

Interest Rate

The proportion of a total amount of money that is charged for borrowing it, frequently presented as a yearly rate.

Marginal Efficiency

Marginal efficiency relates to the additional utility or benefit gained from consuming or producing one more unit of a good or service.

Inventory Investment

The purchase of goods that are not sold immediately but are held for future sales, contributing to a company's assets.

Inventory

The total amount of goods and materials held in stock by a business or company.