Calculate the total amount of any interest expense associated with each financing plan. To do so, multiply the interest rate by face value of the instruments and the number of periods you’ll pay interest.
How do you find the point of indifference?
The indifference point will be 18,333 units, calculated as follows, Q indicates unit Volume. At volumes below 18,333 units, production A gives lower total costs (and higher profits); above 18,333 units, production B gives higher profits. The line Rs 3Q = Rs 55,000 gives a clue to the trade-off between the alternatives.
How do you find EPS when given EBIT?
To calculate the level of EBIT where EPS remains stable, simply input the debt interest, current EPS and updated shares outstanding values and solve for EBIT: ($10.50 x 20,000) + 0 ÷ (1 – 0.3) + $500 = $300,500. Under this financing plan, the company must more than double its earnings to maintain a stable EPS.
What is the purpose of calculating the EBIT-EPS indifference level?
EBIT-EPS analysis is a technique used to determine the optimal capital structure in which the value of earnings per share (EPS) has the highest amount for a given amount of earnings before interest and taxes (EBIT).
Why are some indifference points negative?
The negative slope of the indifference curve reflects the assumption of the monotonicity of consumer’s preferences, which generates monotonically increasing utility functions, and the assumption of non-satiation (marginal utility for all goods is always positive); an upward sloping indifference curve would imply that a …
What is the indifference point in EBIT EPs?
The EBIT-EPS indifference point is the EBIT level at which the earnings per share is equal under two different financing plans. Simply so, what is indifference point in EBIT EPS analysis? Indifference points refer to the EBIT level at which the EPS is same for two alternative financial plans.
Where do the EBIT and EPs lines intersect?
The two lines intersect at point E where the level of EBIT and EPS both are same under both the financial plans. Point E is the indifference point. The value corresponding to X axis is EBIT and the value corresponding to 7 axis is EPS.
What is the objective of an EBIT-EPs analysis?
In other words, the objective of EBIT-EPS analysis is to determine the effect of using different sources of financing on EPS. EBIT-EPS indifference point is an important tool used to choose between two alternative financing plans. The formula to calculate it is as follows:
When to use EBIT and EPs to calculate leverage?
Suppose we have two financial plans before us: Financing by equity only and financing by equity and debt. Different combinations of EBIT and EPS may be plotted against each plan. Under Plan-I the EPS will be zero when EBIT is nil so it will start from the origin.
