Indifference Point

The EBI’T level at which the EPS is the same for two alternative financial plans is referred to as the indifference point/level. The indifference point may be defined as the level of EBIT beyond which the benefits of financial begin to operate respect to earning share. In operational terms, if the expected level is to exceed the indifference level of EBIT, the use of fixed-charge source of funds (debt) would be advantageous from the viewpoint of EPS, that is, financial leverage will be favorable and lead to an increase in the EPS available to the shareholders, the capital structure should include debt. If, however, the expected level of the EBIT is less than the indifference point, the advantage of EPS would be available from till use of equity capital.

The indifference point between two methods of financing can be obtained mathematically (algebraic approach) as well as graphically.

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