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

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Definitions:

Dramatic Decline

Dramatic decline refers to a rapid and significant decrease in value, quantity, or quality of an economic indicator, asset, or other measurable factors.

Price Increase

A situation where the cost of goods and services rises over a period.

Industry Supply Curve

A graphical representation that shows the quantity of goods that all producers in an industry are willing and able to supply at different price levels.

Upward Slope

A line on a graph that displays a positive relationship between two variables, indicating that as one variable increases, the other variable also increases.