Briefly EXPLAIN the process for analysing Optimal Capital Structure.

(b) Objective of financial management is to maximize wealth. Therefore, one should choose a capital structure which maximizes wealth. For this purpose, following analysis should be done: EBIT-EPS-MPS analysis: Chose a capital structure which maximizes market price per share. For that, start with same EBIT for all capital structures and calculate EPS. Thereafter, either multiply EPS by price earning ratio or divide it by cost of equity to arrive at MPS. Indifference Point analysis: In above analysis, we have considered value at a given EBIT only. What will happen if EBIT changes? Will it change your decision also? To answer this question, you can do indifference point analysis. Financial Break-Even Point (BEP) analysis: With change in capital structure, financial risk also changes. Though this risk has already been considered in PE ratio or in cost of equity in point one above, but one may calculate and consider it separately also by calculating Financial BEP.