EBIT - EPS indifference point is the level of :
EBIT that produces the same level of EPS for two alternative capital structures.
Option 1 — EBIT that produces the same level of EPS for two alternative capital structures is correct.
The EBIT-EPS indifference (or break-even) point is used in capital-structure planning. It is the level of Earnings Before Interest and Taxes at which two different financing plans — say, an all-equity plan versus a debt-plus-equity plan — yield exactly the same Earnings Per Share.
The significance of this point guides the financing decision:
| If expected EBIT is... | Preferred plan |
|---|---|
| Above the indifference level | The plan with more debt (financial leverage) — it gives higher EPS |
| Below the indifference level | The plan with more equity — debt would depress EPS |
| Exactly at the level | Both plans give identical EPS (management is indifferent) |
Why the other options are wrong: It is not the EBIT that maximises EPS (option 2); ‘EPS that optimises EBIT’ (option 3) reverses the relationship; and it has nothing to do with a capital structure that leaves the cost of debt \(K_d\) unchanged (option 4).
Takeaway: The indifference point is the EBIT at which two alternative capital structures give the same EPS.
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