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CA Intermediate · Financial Management and Strategic Management · Financing Decisions - Leverages

At the financial break-even point of a firm, which statement is correct?

At the financial break-even point, EBIT just equals interest plus the tax-grossed-up preference dividend, so earnings available to equity shareholders and EPS are zero. It differs from operating break-even, where contribution equals fixed operating cost and EBIT is zero.

  1. AEBIT equals fixed operating cost
  2. BEBIT equals interest plus grossed-up preference dividend, so EPS is zeroCorrect
  3. CContribution equals EBIT
  4. DEBT is equal to EBIT

Explanation

Financial break-even EBIT is the level that just covers interest and preference dividend (grossed up for tax), so EPS is nil. Operating break-even is where EBIT is zero, i.e. contribution equals fixed cost, which is why the first option is wrong.

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