+7 925 966 4690, 9am6pm (GMT+3), Monday – Friday
ИД «Финансы и кредит»

JOURNALS

  

FOR AUTHORS

  

SUBSCRIBE

    
Financial Analytics: Science and Experience
 

The procedure for applying the EBIT volatility method and the EBIT-EPS analysis model in the financial decision-making process

Vol. 8, Iss. 36, SEPTEMBER 2015

PDF  Article PDF Version

Received: 5 August 2015

Accepted: 26 August 2015

Available online: 13 October 2015

Subject Heading: ASSESSMENT AND APPRAISAL ACTIVITIES

JEL Classification: 

Pages: 24-37

Zadorozhnaya A.N. Omsk State Transport University, Omsk, Russian Federation
anna_zador@mail.ru

Importance The article presents methods for assessing the debt burden in order to form an optimal loan portfolio, which will boost the business value. As the practice shows, there is no versatile and correct solution, and each specific company should stipulate in its financial policy how to choose criteria for optimizing its debt burden.
     Objectives The research examines models for substantiating an optimal structure of the capital through the risk-return trade-off: EBIT volatility method, EBIT-EPS analysis method.
     Methods I analyzed how the theories of capital structure evolved after the Modigliani-Miller theory had appeared, and figured out that the outcome of theoretical researches into the capital structure formation was still difficult to be practically implemented. I tested the EBIT volatility method and EBIT-EPS analysis model and used the case of Rostelecom to analyze whether the optimal debt burden model could be practically applied in relation to the risk-return trade-off function.
     Results The calculation of the corporate debt capacity that correlates with the optimal debt burden, is a tool to manage the financial flexibility of the company. The outcome of the EBIT volatility method allows concluding that the current debt burden is within tolerable limits, and modeling the probability of default for various combinations of the capital structure.
     Conclusions and Relevance The EBIT-EPS analysis model allows evaluating the financial break-even point and determining an option for financing a transaction, so to derive maximum earnings per share. Notwithstanding that the article features the optimal debt burden models that have some weaknesses, the results may help financial executives take reasonable decisions on the capital structure management.

Keywords: structure, capital, debt burden, borrowing capacity, volatility

References:

  1. Modigliani F., Miller M. The Cost of Capital, Corporation Finance and the Theory of Investment. American Economic Review, 1958, vol. 48, no. 3, pp. 261-297.
  2. Modigliani F., Miller M. Skol'ko stoit firma? Teorema MM [Russian edition of selected works. How much does the firm cost? The Modigliani–Miller theorem]. Moscow, Delo Publ., 2001, 272 p.
  3. Kraus A., Litzenberger R.H. A State-Preference Model of Optimal Financial Leverage. The Journal of Finance, 1973, vol. 28, iss. 4, pp. 911-922.
  4. DeAngelo H., Masulis R. Optimal Capital Structure under Corporate and Personal Taxation. Journal of Financial Economics, 1980, vol. 8, pp. 3-29.
  5. Kim E.H. Miller’s Equilibrium, Shareholder Leverage Clienteles, and Optimal Capital Structure. The Journal of Finance, 1982, vol. 37, iss. 2, pp. 301-319.
  6. Bradley M., Gregg A.J., Kim E.H. On the Existence of an Optimal Capital Structure: Theory and Evidence. The Journal of Finance, 1984, vol. 39, no. 3, pp. 857–878.
  7. Fischer E.O., Heinkel R., Zechner J. Dynamic Capital Structure Choice: Theory and Tests. The Journal of Finance, 1989, vol. 44, iss. 1, pp. 19-40.
  8. Donaldson G. Corporate Debt Capacity. Harvard University Press, Boston, 1961.
  9. Myers S., Majluf N. Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have. Journal of Financial Economics, 1984, vol. 13, iss. 2, pp. 187-221.
  10. Krasker W. Stock Price Movements in Response to Stock Issues under Asymmetric Information. The Journal of Finance, 1986, vol. 41, no. 1, pp. 93-105.
  11. Narayanan M.P. Debt versus Equity under Asymmetric Information. The Journal of Financial & Quantitative Analysis, 1988, vol. 23, no. 1, pp. 39-51.
  12. Ross S.A. The Determination of Financial Structure: the Incentive-Signalling Approach. The Bell Journal of Economics, 1977, vol. 8, no. 1, pp. 23-40.
  13. Leland H., Pyle D. Informational Asymmetries, Financial Structure and Financial Intermediation. The Journal of Finance, 1977, vol. 32, no. 2, pp. 371-387.
  14. Heinkel R. A Theory of Capital Structure Relevance under Imperfect Information. The Journal of Finance, 1982, vol. 37, iss. 5, pp. 1141–1150.
  15. Jensen M., Meckling W. Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 1976, vol. 3, no. 4, pp. 305-360.
  16. Grossman S., Hart O. Corporate Financial Structure and Managerial Incentives. In: Economics of Information and Uncertainty. Chicago, University of Chicago Press, 1982.
  17. Jensen M. Agency Costs of Free Cash Flow, Corporate Finance and Takeovers. The American Economic Review, 1986, vol. 76, no. 2, pp. 323-329.
  18. Bikhchandani S., Hirshleifer D., Welch I. A Theory of Fads, Fashion, Custom and Cultural Change as Informational Cascades. Journal of Political Economy, 1992, vol. 100, no. 5, pp. 992-1026.
  19. Bikhchandani S., Hirshleifer D., Welch I. Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades. The Journal of Economic Perspectives, 1998, vol. 12, no. 3, pp. 151–170.
  20. Myers S. Interactions of Corporate Financing and Investment Decisions-Implications for Capital Budgeting. The Journal of Finance, 1974, vol. 29, no. 1, pp. 1-25.
  21. Teplova T.V., Getalova A.S. Rabota na zaemnom kapitale: optimum dolgovoi nagruzki kompanii: ot teoreticheskikh kontseptsii k prakticheskim model'nym obosnovaniyam (chast’ 2) [Operations backed with borrowings: the optima debt burden of the entity: from the theoretical concept towards practical and model rationale (Part 2)]. Upravlenie korporativnymi finansami = Corporate Finance Management, 2013, no. 5, pp. 262-279.
  22. Damodaran A. Applied Corporate Finance. 3rd Edition. Willey, 2010, 752 p.
  23. Van Horne J. Osnovy upravleniya finansami [Fundamentals of Financial Management]. Moscow, Finansy i statistika Publ., 2003, 800 p.

View all articles of issue

 

ISSN 2311-8768 (Online)
ISSN 2073-4484 (Print)

Journal current issue

Vol. 17, Iss. 1
March 2024

Archive