FIN/419 week 4 discussion question 2

Hi, Class,

EBIT-EPS focuses on maximizing earnings according to the text. ; While operating a company, it is beneficial to calculate optimal capital structures for the company as time goes along. ; This is because different capital structures produce different levels of earnings (and therefore, different EPS values). ; The desire is to maximize the EPS for the sake of the shareholders. ; But, ;a simple measure of EPS ignores risk. ; Why? ; The EBIT-EPS measure seeks to maximize the EPS, but not necessarily maximize the stock price. ; We saw an example of this in the Week 2 case study. ; Why does this measure ignore risk? ; In what way could a risk premium be built into the equation such that risk is considered and the result is a financial measure that does focus on increasing shareholder wealth?

This reminds me that there are many financial measures that can be calculated and used to run a business optimally. ; But, each has its own considerations, applications ;and assumptions. ; Not being aware of these can lead to an incorrect understanding of the financial decisions that have been or should be made to optimize shareholder wealth. ; Handle financial metrics with care!.