This study is born out of the need to establish the presence of the responsiveness of capital structure performances through EBIT-EPS analysis as performances indicators to turnovers the company's performances, which is measure of leverage, ratios with respect to the company's needs.
Capital structure is one of the most complex areas of financial decision making. Poor capital structure decision can result in a high cost of capital .effective capital structure decision can lower the cost of capital.
The Company chooses how much debt finance and how much equity finance to use by balancing the costs and benefits. While deciding on the appropriate capital structure for an organization, the first thing is to understand the affect on Earning Per Share (EPS) due to the changes in Earning Before Interest and Taxes (EBIT) under different financing alternatives.
EBIT - Earnings Before Interest and Taxes. Accountants like to use the term for this income statement item, but finance people usually refer to it as EBIT. Either way, on an income statement, it is the amount of income that a company has after subtracting operating expenses from sales .Another way of looking at it is that this is the income that the company has before subtracting interest and taxes (hence, EBIT).
EPS - Earnings per Share. This is the amount of income that the common stockholders are entitled to receive (per share of stock owned). This income may be paid out in the form of dividends, retained and reinvested by the company, or a combination of both.
One way of determining the right mix of capital is to measure the impacts of different financing plans on Earnings per Share (EPS). The objective is to find the level of EBIT (Earnings before Interest Taxes) and EPS (earnings per share). Our results reveal that performances indicators used in our study are significantly sensitive to the capital structure for most of the companies considered in or study.
We computed the degree of leverage, rations & percentage change in EBIT –EPS in order to achieve our study of objectives.
[...] The EBIT-EPS approach to capital structure involves selecting the capital structure that maximizes EPS over an expected range of earnings before interest and taxes. This analysis discloses the effect of different financing plans on EPS at various levels of EBIT To analysis the effects of a firm's capital structure on the owners returns, between EBIT and EPS is considered. EBIT is used where constant business risk is assumed. EPS is used to measure the owner's returns which are expected to be closely related to the share price We determining the right mix of capital are to measure the impacts of different financing plans on Earnings per Share (EPS). [...]
[...] The existence of an optimum capital structure is not accepted by all. These exist two extreme views and middle position. David Durand identified the two extreme views the net income and net operating approaches NET INCOME APPROACH: Under the net income approach the cost of debt and cost of equity are assumed to be independent to the capital structure. The weighted average cost of capital declines and the total value of the firm rise with increased use of leverage NET OPERATING INCOME APPROACH: Under the net operating income (NOI) approach, the cost of equity is assumed to increase linearly with average. [...]
[...] Alternatively, what is the relationship between capital structure and cost of capital? Remember the valuation and cost of capital is inversely related. Given a certain level of earnings, the vale of the firm is too maximized when the cost of capital is minimized and vice versa There are different view on how capital structure influences value. Some argue that there is no relationship what so ever between capital structure and firm value ; other believe that financial leverage ( i.e., the use of debt capital ) has a positive effect on firm value up to a point and negative effect thereafter; still other contend that, other things being equal, greater the leverage, greater the value of the firm . [...]
[...] NEED FOR THE STUDY To study the financial performance through capital structure and the aspects that is involved in the capital structuring and financial decision of the company and to increase the efficiency of financing decision making solutions. Scope of study Study about organization Methodology of calculation EBIT-EPS Annual report for the five year Strengths and weaknesses of the organization Steps to be taken to control generation costs Steps to be taken to strengthen the organization Conclusion Diagrams and other enclosure Limitations of the study Time is the major limiting factor duration of 45 days is not sufficient to cover all aspect of the study. [...]
[...] The initial capital structure should be designed very carefully. The Management of the company should set a target capital structure and the subsequent financing decision should be made with the view to achieve the target capital structure. The financial manager has also to deal with an existing capital structure. The company needs funds to finance its activities continuously. Every time when fund shave to be procured, the financial manager weights the pros and cons of various sources of finance and selects the most advantageous sources keeping in the view the target capital structure. [...]
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