The indifference point is the level of volume at which total costs, and hence profits, are the same under both cost structures. If the company operated at that level of volume, the alternative used would not matter because income would be the same either way.
What is indifference point in capital structure?
Indifference points refer to the EBIT level at which the EPS is same for two alternative financial plans. According to J. C. Van Home, ‘Indifference point refers to that EBIT level at which EPS remains the same irrespective of debt equity mix’.
How do you find the point of indifference?
To calculate the Cost Indifference Point, divide the differential fixed costs by the differential variable costs per unit.
What is the level of EBIT at the point of indifference?
The indifference level of EBIT is one at which the EPS remains same irrespective of the debt equity mix.
How do you calculate EBIT EPS indifference?
Set the EBIT level as the independent variable, or x variable, for the equation. Subtract any interest expenses associated with the financing plan from x and multiply by the tax rate.
What is EBIT and EPS?
EPS, of course, largely depends on a company’s earnings. For EPS calculation, earnings before interest and taxes (EBIT) is used because it reflects the amount of profit that remains after accounting for those expenses necessary to keep the business going. EBIT is also often referred to as operating income.
What is the EPS formula?
Earnings per share is calculated by dividing the company’s total earnings by the total number of shares outstanding. The formula is simple: EPS = Total Earnings / Outstanding Shares. Total earnings is the same as net income on the income statement. It is also referred to as profit.
What are indifference curves?
What Is an Indifference Curve? An indifference curve is a chart showing various combinations of two goods or commodities that leave the consumer equally well off or equally satisfied—hence indifferent—when it comes to having any combination between the two items that is shown along the curve.
What is margin of safety?
Margin of safety is a principle of investing in which an investor only purchases securities when their market price is significantly below their intrinsic value. In other words, when the market price of a security is significantly below your estimation of its intrinsic value, the difference is the margin of safety.
What are types of leverage?
There are two main types of leverage: financial and operating. To increase financial leverage, a firm may borrow capital through issuing fixed-income securities or by borrowing money directly from a lender.
Is EBIT a revenue?
Earnings before interest and taxes (EBIT) is an indicator of a company’s profitability. EBIT can be calculated as revenue minus expenses excluding tax and interest. EBIT is also referred to as operating earnings, operating profit, and profit before interest and taxes.
What is breakeven EBIT?
Concept 2.1: Indifference Point
What are the types of capital structure?
The meaning of Capital structure can be described as the arrangement of capital by using different sources of long term funds which consists of two broad types, equity and debt. The different types of funds that are raised by a firm include preference shares, equity shares, retained earnings, long-term loans etc.
What is arbitrage process in capital structure?
What is Capital Structure Arbitrage? Capital structure arbitrage refers to a strategy used by companies where they take advantage of the existing market mispricing across all securities to make profits. In this strategy, there is buying undervalued securities and selling of the same company’s overvalued securities.
What are the factors of capital structure?
Factors determining capital structure are given below −
- Trading on equity.
- Degree of control.
- Flexibility of financial plan.
- Choice of investors.
- Capital market condition.
- Period of financing.
- Cost of financing.
- Stability of sales.
What is Miller and Modigliani hypothesis?
What Is the Modigliani-Miller Theorem (M&M)? The Modigliani-Miller theorem (M&M) states that the market value of a company is correctly calculated as the present value of its future earnings and its underlying assets, and is independent of its capital structure.
Why is Modigliani Miller important?
description. The Modigliani-Miller theorem explains the relationship between a company’s capital asset structure and dividend policy and its market value and cost of capital; the theorem demonstrates that how a manufacturing company funds its activities is less important than the profitability of those activities.
What is a type of leverage?
There are two main types of leverage: financial and operating. To increase financial leverage, a firm may borrow capital through issuing fixed-income securities or by borrowing money directly from a lender.