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

Question

Quizplus · Accepted Answer

The EBIT-EPS approach assumes a constant level of EBIT (earnings before interest and taxes) to isolate the impact of financing costs on returns of the different capital structures. By holding EBIT constant, any differences in EPS (earnings per share) can be attributed solely to the effect of financing costs. This approach helps in identifying the optimal capital structure for a company.

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