How is the EBIT-EPS Indifference point calculated?


Quick Answer

The indifference point is where the EBIT, or earnings before interest and tax, is at a break-even level when the EPS, or earnings per share, remain constant under two different financial plans and is calculated for each plan by the EBIT minus interest expenses multiplied by the income tax rate subtracted by 1, divided by the number of outstanding equity shares according to The Manage Mentor website. The equity finance option is favorable if the current EBIT level is below the break-even EBIT level.

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Full Answer

EBIT is defined as the measure of a company's profit including all expenses except for income tax and interest according to Investor Words. In order to calculate EBIT, the company's expenses are subtracted by its revenues. Profit is determined by subtracting tax and interest. EBIT is monitored by creditors as it reflects the company's operating profit or funds that can be used to pay off debts.

Earnings per share or EPS is a company's net income on a per share basis. EPS is calculated by the company's net income divided by the weighted average number of outstanding equity shares. The Financial Accounting Standards Board requires EPS based on four aspects of a company's income statement: the continuing operations costs, the discontinued operations, extraordinary or nonrecurring costs and net income.

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