One danger of EBIT-EPS analysis is that it ignores the implicit cost of debt financing.

Question

Quizplus · Accepted Answer

EBIT-EPS analysis only considers the impact of changes in earnings before interest and taxes (EBIT) on earnings per share (EPS) and assumes that the capital structure (debt vs equity financing) remains static. However, debt financing involves interest payments, which are an implicit cost that is not considered in EBIT-EPS analysis. As a result, using EBIT-EPS analysis alone to make financial decisions may not fully reflect the true cost of debt financing.

One Danger of EBIT-EPS Analysis Is That It Ignores the Implicit