The EBIT-EPS indifference point is calculated by equating the EPS obtained for different financing options. The Super Pumps example compares two alternatives for $5 million of financing: debt (issuing bonds with a pretax interest cost of 8%) and equity (selling equity at $20 per share). The company already has one million shares outstanding and a tax rate of 37%.
The graph shows EBIT-EPS curves for debt (gold) and equity (blue) financing. Their intersection point is the EBIT-EPS indifference point. You can change the firm's tax rate, the amount to be financed, and the pretax interest on bonds to investigate the impact of these parameters on the indifference point and your financing decision.
| EPS ($ million) | |
| EBIT($ million) | |