CS Executive · Corporate Accounting and Financial Management · Capital Structure
A major limitation of EBIT-EPS analysis as a capital structure tool is that it:
EBIT-EPS analysis looks only at maximising earnings per share and ignores the financial risk of higher fixed charges and the effect on the cost of capital and market value, so the highest-EPS plan need not maximise shareholder wealth.
- AIgnores the effect of interest on EPS
- BCannot be used when preference shares exist
- CRequires no estimate of EBIT
- DMaximises EPS without considering financial risk and cost of capitalCorrect
Explanation
EBIT-EPS analysis focuses on EPS and does not explicitly account for the risk from higher leverage or the effect on share price and cost of capital. It does include interest, so option A is wrong.
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