The basic shortcoming of the EBIT-EPS approach to capital structure is
A) its disregard for the firm's dividend policy.
B) that the optimal capital structure is difficult to compute.
C) its disregard for the presence of preferred stock in the capital structure.
D) that it concentrates on the maximization of EPS rather than the maximization of owner's wealth.

Question

Quizplus · Accepted Answer

The EBIT-EPS approach focuses solely on maximizing EPS, which may not necessarily lead to the maximization of owner's wealth. It disregards other important factors such as the cost of capital, risk, and dividend policy. Therefore, it may not provide the optimal capital structure for the firm.

The Basic Shortcoming of the EBIT-EPS Approach to Capital Structure