# EBIT-EPS Indifference Point and Financial Break-even Analysis

## Financial Break-even Point (FBEP)

The minimum level of EBIT needed to satisfy all fixed financial charges (interest + preference dividend grossed up for tax). At FBEP, EPS = 0.

If EBIT < FBEP => EPS is negative
If EBIT > FBEP => more fixed-cost financing instruments can be considered
If EBIT is uncertain or low => equity financing is preferred

## EBIT-EPS Indifference Point

The EBIT level at which EPS is the same under two alternative financing plans, regardless of the debt-equity mix.

### Formula

(EBIT - I1)(1 - T) / E1 = (EBIT - I2)(1 - T) / E2

Symbol	Meaning
EBIT	Indifference point EBIT
E1, E2	Number of equity shares under Alternative 1 / 2
I1, I2	Interest charges under Alternative 1 / 2
T	Tax rate

### If Preference Dividend Exists

[(EBIT - I1)(1 - T) - PD1] / E1 = [(EBIT - I2)(1 - T) - PD2] / E2

## How to Use the Indifference Point

Expected EBIT > Indifference EBIT => choose the plan with more debt (higher EPS)
Expected EBIT < Indifference EBIT => choose the plan with more equity (higher EPS)
Expected EBIT = Indifference EBIT => EPS is identical; choose based on risk preference

Worked example

### Example 1

Worked Problem: A firm is choosing between:

Plan A: All-equity, 1,00,000 shares of Rs. 10
Plan B: 50,000 equity shares + Rs. 5 lakh debt @ 10%

Tax rate = 50%.

Indifference EBIT:

(EBIT - 0)(1 - 0.5)/1,00,000 = (EBIT - 50,000)(1 - 0.5)/50,000

=> 0.5 EBIT 50,000 = (0.5 EBIT - 25,000) 1,00,000

=> 25,000 EBIT = 50,000 EBIT - 2,50,00,00,000

=> EBIT = Rs. 1,00,000

Above Rs. 1,00,000, Plan B (debt) is better; below it, Plan A (all-equity) is better.

⚠️ Common exam mistakes

Forgetting to gross-up preference dividend for tax in the numerator
Setting up the equation with EPS values instead of using shares in denominators
Confusing financial break-even (EPS = 0) with the indifference point (EPS equal under two plans)
Failing to compare expected EBIT against the indifference EBIT to make the financing choice

Reference:

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EBIT-EPS Indifference Point & Financial Break-even

Worked example

⚠️ Common exam mistakes