P/E and EPS use net income, which takes into account the capital structuer of a company, but why is the net income considered to be value that equity holders receive?
Is net income what dividends are based on? How does it exclude debt? Since it includes interest payments...which must include paying debt holders?
When you subtract interest expense when determining net income, you are effectively "paying the debt holders". So the residual (the net income) is the value owed to equity shareholders.
When you use other metrics that do not subtract the effects of interest expense (EBIT, EBITDA, Revenue), you use an Enterprise Value multiple, because this is the value owed to both debt and equity shareholders.
Hope this makes sense.
Yes dividends are paid from Net Income. NI - Dvds = Retained Earnings
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