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CS Executive · Corporate Accounting and Financial Management · Capital Structure

In EBIT-EPS analysis of financing alternatives, the indifference point is best described as the level of EBIT at which:

The indifference point is the EBIT level at which two alternative financing plans produce the same earnings per share. Above this level the plan with more fixed-charge financing gives higher EPS, while below it the equity-based plan is better for shareholders.

  1. AEarnings per share is the same under two alternative financing plansCorrect
  2. BEarnings per share becomes zero under every plan
  3. CFinancial leverage becomes equal to operating leverage
  4. DThe firm's tax liability becomes zero

Explanation

The indifference point is the EBIT at which two financing plans give identical EPS. Above it the plan with more fixed-cost financing gives higher EPS; below it the equity-heavy plan does better. Option C mixes up leverage measures and has nothing to do with the definition.

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