Indifference Point Homework Help
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There is a point on the EBIT level i.e. Earnings before interest and tax level beyond which the financial leverage benefits operate with respect to the earnings per share (EPS) and that point is known as Indifference Point. From earnings per share viewpoint, the use of fixed cost source of funds will be beneficial if the indifference point is exceeded by the earnings before interest and tax level. And thus, the financial leverage would be favourable. In a similar way, if the EBIT level is less than the indifference point, then the EPS will be available from the use of equity capital, not debt capital. At indifference point, the earnings per share are same for two alternative financial plans. Indifference Point Homework Help shall help you know more about the indifference point.
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Calculation of Indifference Point
Before moving on to the indifference point, let us know briefly about the EBIT i.e. the earnings before interest and tax and EPS i.e. Earnings per share. EBIT is nothing but the measure of profit generated by a company through its operations, can also be called as operating profit. It focuses on the company’s earnings purely from its operations avoiding taxes and interests. Earnings per share (EPS) are considered as the most important variable to determine a company’s share prices. It is the indicator of a company’s profitability. Usually here a portion of company’s share is allocated to each outstanding share of the common stock.
Let us now have a clearer idea about the indifference point, how to calculate the indifference point, and the algebraic approach to point of indifference, etc.
• The point of indifference can be calculated by using the formula mentioned below in the Indifference Point Homework Help.
(X-I1) (1-T)-PD/S1 = (X-I2) (1-T)-PD/S2
X= EBIT indifference level
I1= Fixed interest cost under 1st alternative
I2= Fixed interest cost under 2nd alternative
PD= preference dividend
T= tax rate
S1= number of equity shares under 1st alternative
S2= number of equity shares under 2nd alternative
For further information about the point of indifference, students can refer to Indifference Point Homework Help.
• The algebraic approach to calculate the indifference point is very easy and simple. The formula is:
Earnings per share (EPS) without debt = Earnings per share (EPS) with debt
• Basically the point of indifference is used to determine the optimal capital structure of a firm. Business firms opt for two types of finances in terms of long term financing which are debt and equity. It is mentioned in Indifference Point Homework Help.
• In some cases, the point of indifference of the capital structure does not make difference for a corporation to care whether they issue a new debt or have no debt or have 100% equity or have a combination of both debt and equity.
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