What is the EBIT EPS indifference point?
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 calculate EBIT-EPS indifference?
Calculation of cost indifference point
- E = EBIT.
- I = Interest on debt capital.
- t = corporate tax rate.
- N1= Number of own shares outstanding under the first alternative financing plan.
- N2= Number of own shares outstanding under the second alternative financing plan.
What is the relationship between 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 is point of indifference?
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 EBIT and EPS analysis?
The EBIT-EPS analysis gives the best ratio of debttoequity which the businesses can use to find an optimum balance in their debt and equity financing. The analysis shows the effect of the balance sheet’s structure on the company’s earnings.
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 contribution margin ratio?
The contribution margin ratio is the difference between a company’s sales and variable expenses, expressed as a percentage. The total margin generated by an entity represents the total earnings available to pay for fixed expenses and generate a profit.
What are indifference curves?
An indifference curve shows a combination of two goods that give a consumer equal satisfaction and utility thereby making the consumer indifferent. Along the curve, the consumer has an equal preference for the combinations of goods shown—i.e. is indifferent about any combination of goods on the curve.
What are the 6 properties of indifference curve?
Properties of Indifference Curve with Diagram
- All Combinations on an Indifference Curve Give Same Level of Satisfaction. …
- A Higher Difference Curve Shows a Higher Level of Satisfaction. …
- Indifference Curves always Slope Downwards from Left to Right. …
- Indifference Curves Never Cut Each Other.
What is Consumer’s equilibrium?
Consumer’s equilibrium refers to the situation when a consumer is having maximum satisfaction with his limited income and has no tendency to change his way of existing expenditure. The consumer has to pay a price for each unit of the commodity. So he cannot buy or consume unlimited quantity.
What are the five properties of indifference curve?
Characteristics of Indifference Curves
- Indifference curves slop downward to the right. …
- Every indifference curve to the right represents a higher level of satisfaction. …
- Indifference curves cannot intersect each other. …
- Indifference curve will not touch the axis. …
- Indifference curves are convex to the origin.
Why are indifference curves parallel?
6. Indifference Curves need not be Parallel to Each Other. This is because they are not based on the cardinal number system of measurability of utility. Secondly, the rate of substitution between two commodities need not be the same in all indifference schedules.
Why are indifference curves convex?
Indifference curves are convex to the origin because the marginal utility of each product consumed decreases with subsequent consumption. This convex relationship is based upon an idea dubbed the marginal rate of substitution, which is represented by the formula (Z = change in X / change in Y).
Why does indifference curve do not intersect?
The indifference curves cannot intersect each other. It is because at the point of tangency, the higher curve will give as much as of the two commodities as is given by the lower indifference curve. This is absurd and impossible. In the above diagram, two indifference curves are showing cutting each other at point B.
What is the consumer’s marginal rate of substitution?
In economics, the marginal rate of substitution (MRS) is the amount of a good that a consumer is willing to consume compared to another good, as long as the new good is equally satisfying. MRS is used in indifference theory to analyze consumer behavior.
Is indifference curve positively sloped?
The indifference curve is positively sloped when one good is bad and one is good for the consumer. Bad goods refers to those goods which are preferred…
What is the difference between MRS and MRTS?
The MRTS reflects the give-and-take between factors, such as capital and labor, that allow a firm to maintain a constant output. MRTS differs from the marginal rate of substitution (MRS) because MRTS is focused on producer equilibrium and MRS is focused on consumer equilibrium.
What is MOC and MRT?
Answer: MRT is the ratio of loss of output y to gain output x interms of unit and MOC is the ratio of unit sacrifice to gain additional unit of another good in terms of money.
What is MRT in economics?
The marginal rate of transformation (MRT) is the number of units or amount of a good that must be forgone to create or attain one unit of another good. It is the number of units of good Y that will be foregone to produce an extra unit of good X while keeping the factors of production and technology constant.