FIN/419 week 4 discussion question 2

Apr 5th, 2015
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!.

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