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CMA Intermediate · Financial Management and Business Data Analytics · Leverage Analyses and EBIT - EPS Analysis

In an EBIT-EPS chart, the lines for two financing plans are drawn with EBIT on the horizontal axis and EPS on the vertical axis. What does the point where the two lines intersect represent?

The intersection shows the indifference point, the EBIT level at which both financing plans give the same EPS. Below it the lower-leverage plan is better, and above it the higher-leverage plan gives higher EPS.

  1. AThe EBIT level at which both plans give the same EPSCorrect
  2. BThe EBIT level at which EPS is zero for both plans
  3. CThe EBIT level at which the degree of operating leverage is highest
  4. DThe EBIT level at which the firm's cost of equity equals its cost of debt

Explanation

Each line plots EPS against EBIT for one plan. Where the lines cross, EPS is identical for both plans, which is the indifference point. The horizontal intercept of each line (EPS zero) equals that plan's fixed financial charges, not the intersection.

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