The max EPS Paradigm for Corporate Finance

There are three classic problems in corporate finance: capital structure, real investment, and payout policy. In three companion papers, we characterize the max EPS solution to each one. The max EPS approach delivers an optimal leverage ratio even in the absence of frictions, an investment rule based on comparing yields rather than using a risk-adjusted discount rate, and a payout policy where accretive buybacks are preferred to neutral dividends. Our max EPS model draws a bright line between growth and value. Growth stocks have earnings yields below the riskfree rate; value stocks have earnings yields above it. This single comparison leads the two kinds of firms to pursue different constellations of EPS-maximizing policies. The model also produces easy-to-follow calculations that closely mirror what practitioners actually do. This review article ties together these results to form a new max EPS paradigm for corporate-finance research.