A study of capital structure performance using EBIT-EPS analysis

Type :

Research papers

Pages :

24 pages

Format :

.doc

Published date :

04/21/2009

Category :

Business & market

Sub category :

Finance

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Summary :

Abstract
Introduction
Need for the study
1. Scope of study
2. Limitations of the study
3. Primary sources
Review literature
1. Capital structure analysis
2. Factors affecting the capital structure
3. Features of an optimal capital structure
Capital structure and firm value
1. The capital structure decision process
2. Capital structure and planning
3. Features of an appropriate capital structure
4. Approaches to establish appropriate capital
The capital structure controversy
1. Net income approach
2. Net operating income approach
3. Traditional approach
4. Cost of capital and valuation approach
5. Cash flow approach
Financing decision
Strategies in finance mobilization
Limitation of ELPS as financing
1. Decision criterion
2. EPS variability and financial risk
Ffinancial leverage
1. Definition
2. Meaning of financial leverage
3. Financial leverage and the shareholders risk
4. Operating risk
5. The variability of EBIT
6. Financial risk
7. Measures of financial leverage
8. Financial leverage and the share holders return
Combined effect of operating and financial leverages
Ratio analysis
1. Capital structure ratios
Biblography

Abstract

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.