FIN/419 week 4 discussion question 2

Apr 5th, 2015
Anonymous
Category:
Accounting
Price: $10 USD

Question description

Hi, Class,

EBIT-EPS focuses on maximizing earnings according to the text.  While operating a company, it is beneficial to calculate optimal capital structures for the company as time goes along.  This is because different capital structures produce different levels of earnings (and therefore, different EPS values).  The desire is to maximize the EPS for the sake of the shareholders.  But, a simple measure of EPS ignores risk.  Why?  The EBIT-EPS measure seeks to maximize the EPS, but not necessarily maximize the stock price.  We saw an example of this in the Week 2 case study.  Why does this measure ignore risk?  In what way could a risk premium be built into the equation such that risk is considered and the result is a financial measure that does focus on increasing shareholder wealth?

This reminds me that there are many financial measures that can be calculated and used to run a business optimally.  But, each has its own considerations, applications and assumptions.  Not being aware of these can lead to an incorrect understanding of the financial decisions that have been or should be made to optimize shareholder wealth.  Handle financial metrics with care!.


Tutor Answer

(Top Tutor) Academichelpcenter
School: UIUC

Studypool has helped 1,244,100 students

Review from student
Anonymous
" Outstanding Job!!!! "
Ask your homework questions. Receive quality answers!

Type your question here (or upload an image)

1829 tutors are online

Brown University





1271 Tutors

California Institute of Technology




2131 Tutors

Carnegie Mellon University




982 Tutors

Columbia University





1256 Tutors

Dartmouth University





2113 Tutors

Emory University





2279 Tutors

Harvard University





599 Tutors

Massachusetts Institute of Technology



2319 Tutors

New York University





1645 Tutors

Notre Dam University





1911 Tutors

Oklahoma University





2122 Tutors

Pennsylvania State University





932 Tutors

Princeton University





1211 Tutors

Stanford University





983 Tutors

University of California





1282 Tutors

Oxford University





123 Tutors

Yale University





2325 Tutors