Question

The EBIT-EPS indifference point:

A.Depends on the firm's tax rate when EPS is greater than EBIT.

B.Never depends on the firm's tax rate.

C.Always depends on the firm's tax rate.

D.Depends on the firm's tax rate when EBIT is greater than EPS.

Answer 1

EBIT-EPS analysis gives a scientific basis for comparison among various financial plans and shows ways to maximize EPS. Hence EBIT-EPS analysis may be defined as ‘a tool of financial planning that evaluates various alternatives of financing a project under varying levels of EBIT and suggests the best alternative having highest EPS and determines the most profitable level of EBIT’.The EBIT-EBT analysis is the method that studies the leverage, i.e. comparing alternative methods of financing at different levels of EBIT. Simply put, EBIT-EPS analysis examines the effect of financial leverage on the EPS with varying levels of EBIT or under alternative financial plans.

Correct answer is (b)