In the EBIT-EPS approach to capital structure, a constant level of EBIT is assumed
A) to emphasize the relationship between interest expenses and taxes.
B) to ease the calculations of owners' equity.
C) to isolate the impact on returns of the financing costs associated with alternative capital structures.
D) to concentrate on the effect of revenue and expense on capital structure decisions.

Question

Quizplus · Accepted Answer

The EBIT-EPS approach to capital structure assumes a constant level of EBIT to isolate the impact on returns of the financing costs associated with alternative capital structures. This approach helps in analyzing the effect of different capital structures on the earnings per share (EPS) and the financial risk of the company. By assuming a constant level of EBIT, the analysis focuses on the effect of financing choices on the EPS of the company.

In the EBIT-EPS Approach to Capital Structure, a Constant Level