Describe the way in which earnings per share responds to changing EBIT in a firm with
a. No fixed financing costs. A firm with no fixed financing costs has no financial leverage. In such a firm, earnings per share will rise…
Describe the way in which earnings per share responds to changing EBIT in a firm with
How does a firm’s financial leverage affect: Financial leverage changes a firm’s returns and risk.
a. Its profitability? Financial leverage changes a firm’s earnings per share. To the left of the indifference point (lower EBIT) between financing alternatives financial leverage…
EBIT levels
A firm is considering two alternative capital structures, and has calculated its profitability at various EBIT levels under each structure. What should the firm do…
Net income approach
Compare and contrast the “net income approach,” “net operating income approach,” and “traditional approach” to the optimal debt-equity mix. Which assumptions do you find reasonable?…
Describe “homemade leverage.”
Homemade leverage is investors’ method of substituting their own borrowing or lending for corporate borrowing. Investors who want more leverage than a company has taken…
What role does each of MM’s assumptions play in their theory of the debt-equity mix?
MM’s key assumptions and the role played by each are: (1) Unlimited borrowing and lending is available to all market participants at one rate of…
Is Professor Miller’s personal tax model relevant in today’s tax environment?
Miller’s personal tax model examined the effect of personal income taxes on the debt-equity mix decision. He observed that personal income taxes in the U.S….
What are the variables that enter compromise theory?
What is the effect of each on the optimal debt-equity mix? In compromise theory, the value of a levered firm equals the value of the…
What is meant by the “pecking order approach”?
The pecking order approach is a sequence of raising financing that many companies seem to follow, even though it ignores the recommendations of the various…
Define the meaning of each letter of “FRICTO,” and give an illustration of each
FRICTO is an acronym summarizing important issues that affect the debt-equity mix decision in practice: (1) F = flexibility -the impact of alternative financing choices…