Why do maximizing EPS and maximizing value not necessarily lead to the same conclusion about the

QUESTION

Why do maximizing EPS and maximizing value not necessarily lead to the same conclusion about the optimal capital structure?
Answer: EPS is Net Income available to common shareholders/Common shares outstanding , whereas maximizing value means we need to increase the capital budget allocation which leads to increase in liabilities. EPS can be maximized under situations where Debentureholders and Preference shareholders remain the same or are reduced leading to reduction in the capital budget and henceforth reaching the optimal capital structure . Whereas maximizing value can usually be obtained under situations where capital structure needs to be increased (sometimes going beyond the optimal level, where more Debentureholders and Preference shareholders involve in) . This

ight lead to reduction in EPS as the priority with regards to distribution of NI goes to the Debentureholders and Preference shareholders first . Henceforth , maximizing EPS and maximizing value might not always be positive correlation . Sometimes EPS can be maximized when Optimal Capital structure is reached whereas on the other hand Maximizing value might lead to obstacles in reaching the Optimal capital structure and maximizing EPS.

ANSWER:

CLICK REQUEST FOR  AN EXPERT SOLUTION