Weaknesses of the EBIT-EPS analysis include
A) that it disregards the implicit costs of debt financing.
B) that it ignores the effect of the specific financing decision on the firm's cost of common equity capital.
C) that it considers only the level of the earnings stream and ignores the variability inherent in it.
D) all of the above.

Question

Quizplus · Accepted Answer

The EBIT-EPS analysis has several weaknesses that make it an incomplete tool for evaluating financing decisions. One of these is that it disregards the implicit or hidden costs of debt financing, such as bankruptcy risk and agency costs. Another weakness is that it ignores the effect of the specific financing decision on the firm's cost of common equity capital, which can have a significant impact on the firm's overall cost of capital. Finally, the EBIT-EPS analysis considers only the level of the earnings stream and does not take into account the variability or risk inherent in that stream, which can also have important implications for financing decisions. Thus, all three options are weaknesses of the EBIT-EPS analysis.

Weaknesses of the EBIT-EPS Analysis Include