[amp_mcq option1=”EPS is zero” option2=”EPS is minimum” option3=”EPS is highest” option4=”None of these” correct=”option4″]<\/p>\n
The correct answer is: D. None of these<\/strong><\/p>\n Indifference level of EBIT is the level of EBIT at which the company has no preference between debt and equity financing. This is because the company’s EPS is the same under both financing options.<\/p>\n EPS is calculated as follows:<\/p>\n EPS = EBIT \/ (1 – Tax rate) \/ Number of shares outstanding<\/p>\n When the company finances with debt, the interest expense is tax-deductible. This means that the company’s EBIT after tax is higher under debt financing than under equity financing. However, the company also has to pay interest on the debt. The interest expense reduces the company’s EPS.<\/p>\n The indifference level of EBIT is the level of EBIT at which the tax savings from debt financing offset the interest expense. At this level of EBIT, the company’s EPS is the same under both debt and equity financing.<\/p>\n Option A is incorrect because EPS is not zero at the indifference level of EBIT.<\/p>\n Option B is incorrect because EPS is not minimum at the indifference level of EBIT.<\/p>\n Option C is incorrect because EPS is not highest at the indifference level of EBIT.<\/p>\n","protected":false},"excerpt":{"rendered":" [amp_mcq option1=”EPS is zero” option2=”EPS is minimum” option3=”EPS is highest” option4=”None of these” correct=”option4″]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[945],"tags":[],"class_list":["post-48492","post","type-post","status-publish","format-standard","hentry","category-financial-management","no-featured-image-padding"],"yoast_head":"\n