Question

The primary weakness of EBIT-EPS analysis is that A. it double counts the cost of debt financing. B. it applies only to firms with large amounts of debt in their capital structure. C. it may only be used by firms that are profitable this year. D. it ignores the implicit cost of debt financing.

Answer 1

Answer: Option B

Explanation: EBIT- EPS analysis refers to the analysis in which the potential investors of an organisation judge that organisation on the basis of its ability ot bear operating expense and the amount of revenue they shared with the investors in the past.

EBIT- EPS analysis takes all kinds of expenses into consideration but do not evaluate the implicit cost of taking debt. This analysis do not consider the increase in value of equity due to the issuance of debt as shareholders will now have to bear a higher risk.