## EBIT–EPS Indifference Point
### Meaning
The indifference point is the level of EBIT at which EPS is the same under two different financing plans. At this EBIT, it does not matter which plan is chosen — both give identical EPS.
### Formula
$$\frac{(EBIT - I_1)(1-t) - PD_1}{E_1} = \frac{(EBIT - I_2)(1-t) - PD_2}{E_2}$$
Where:
- EBIT = the indifference-point EBIT (the unknown to solve for)
- E₁, E₂ = number of equity shares under Alternative 1 and 2
- I₁, I₂ = interest charges under each alternative
- PD₁, PD₂ = preference dividend under each alternative
- t = tax rate
> Note: Preference dividend (PD) is not multiplied by (1−t) because it is paid out of post-tax profits.
### Decision Rule — Which Plan to Choose?
| Situation | Choose |
|---|---|
| Expected EBIT < Indifference EBIT | Plan with Lower Fixed Financial Cost |
| Expected EBIT > Indifference EBIT | Plan with Higher Fixed Financial Cost |
| Expected EBIT = Indifference EBIT | Any plan (EPS identical) |
Intuition: Above the indifference point, financial leverage works in your favour (higher fixed-cost plan magnifies EPS). Below it, leverage hurts, so a lower fixed-cost plan is safer.
### When the Indifference Point CANNOT Be Calculated
This happens when the number of equity shares under both alternatives is equal, AND one of the following holds:
1. The fixed financial cost of one alternative is always more than the other → EPS of one alternative is always greater, so the lines never cross.
2. The fixed financial cost of both alternatives is equal → EPS is always the same, so the lines coincide (no single crossing point).
### Graphical View
Plotting EBIT (x-axis) against EPS (y-axis) for each plan gives two straight lines. Their point of intersection is the indifference point.