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EBIT-EPS Indifference Point CalculatorDebt vs Equity Financing

What do the numbers come to once the work is shown?

EBIT at which EPS is the same under debt and equity financing, and EPS under each plan at your expected EBIT.

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Your figures
Example figuresIllustrative only. Type over them with your own.
Indifference EBIT
$2,200,000
EBIT at which both plans give the same EPS
EPS at indifference
$1
EPS under equity plan at expected EBIT
$2
Drawn to one scale
Indifference EBIT$2,200,000
EPS at indifference$1
EPS under equity plan at expected EBIT$2
EPS under debt plan at expected EBIT$2
All results
MeasureResult
Indifference EBIT$2,200,000
EPS at indifference$1
EPS under equity plan at expected EBIT$2
EPS under debt plan at expected EBIT$2
Higher EPS at expected EBITDebt plan
How this was worked out
Work shownrecomputed as you type
Equity plan: EPS = (EBIT - I1)(1 - t) / N1
Debt plan: EPS = (EBIT - I2)(1 - t) / N2
Indifference EBIT = (N2 x I1 - N1 x I2) / (N2 - N1)

Illustrative arithmetic on the figures you enter. Check the result against your firm's methodology before relying on it.

The formulas

  • Equity plan: EPS = (EBIT - I1)(1 - t) / N1
  • Debt plan: EPS = (EBIT - I2)(1 - t) / N2
  • Indifference EBIT = (N2 x I1 - N1 x I2) / (N2 - N1)

How it works

Funding a project with debt adds fixed interest. Funding it with equity adds shares. Below the indifference EBIT, the equity plan gives higher EPS, because interest eats a large share of a small profit. Above it, the debt plan wins, because the extra profit is spread over fewer shares.

The EPS view ignores risk. Higher debt raises the chance of distress and the volatility of EPS, which pushes up the cost of equity. Use the indifference point with your forecast range of EBIT: if a bad year falls well below it, debt hurts in exactly the year it matters.

Illustrative figures only. Check the result against your firm's methodology before relying on it.

Common questions

What about preferred stock?

Preferred dividends are not deductible. Subtract them from after-tax income, before dividing by shares, in the plan that issues them.

Why does the tax rate not change the indifference point?

Tax scales both plans by the same factor, so it cancels.

What share price sets the new share count?

The net amount raised divided by the issue price after costs.

Formulas on this page are the standard definitions.

Runs in your browser. The figures you type are not sent to CORAA or stored. Check the result against your firm's methodology before relying on it.

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