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CS Executive · Corporate Accounting and Financial Management · Operational Approach to Financial Decision

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

The indifference point is the EBIT level at which two financing plans yield the same earnings per share. Below it one plan is better, above it the other is, so it guides the choice between equity and debt financing.

  1. ABoth plans give the same earnings per shareCorrect
  2. BBoth plans give the same total interest cost
  3. CThe firm's financial leverage becomes zero
  4. DThe firm's operating leverage equals its financial leverage

Explanation

The indifference point is the EBIT at which two alternative financing plans produce identical EPS. Interest cost differs between plans (so option 2 is wrong), and leverage need not be zero or equal to operating leverage at that level.

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