DISCUSS financial break-even and EBIT-EPS indifference analysis.

Financial Break-even and EBIT-EPS Indifference Analysis Financial break-even point is the minimum level of EBIT needed to satisfy all the fixed financial charges i.e. interest and preference dividend. It denotes the level of EBIT for which firm's EPS equals zero. If the EBIT is less than the financial breakeven point, then the EPS will be negative but if the expected level of EBIT is more than the breakeven point, then more fixed costs financing instruments can be taken in the capital structure, otherwise, equity would be preferred. EBIT-EPS analysis is a vital tool for designing the optimal capital structure of a firm. The objective of this analysis is to find the EBIT level that will equate EPS regardless of the financing plan chosen. (EBIT − I 1 )(1-T) / E 1 = (EBIT − I 2 )(1-T) / E 2 Where, EBIT = Indifference point E 1 = Number of equity shares in Alternative 1 E 2 = Number of equity shares in Alternative 2 I 1 = Interest charges in Alternative 1 I 2 = Interest charges in Alternative 2 T = Tax-rate