Explain the importance of the break - even EBIT.

Expert Solution

Breakeven EBIT is level of EBIT where EPS of unlevered firm & levered firm are same. It is the point of EBIT where decision of debt & equity proportion do not disturb EPS available to equity shareholders. It is derived from EBIT-EPS approach to capital structure which studies impact of balance sheet structure on earnings of shareholder. Here EBIT refers to earnings available to all investors of company & EPS refers to portion of earnings attributable to only equity shareholders & careful analysis of relation between both metrics give us better insights on ideal capital structure. This point is used to compare multiple capital structures and thus take decision as to which structure should be accepted for a particular range of EBIT.

One way of determining right mix of capital is by measuring impacts of different financing plans on EPS. The objective is to find level of EBIT (Earnings Before Interest Taxes) , the point where EPS does not change. It is the EBIT Breakeven where EPS will be same under each financing plan under consideration.

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Break-Even Point

S.S Corporation had sales of Rs. 4,500,000. The fixed expense was Rs. 1,200,000 and variable expense totaled Rs. 1,800,000. You are required to calculate Break-Even Point for S.S Corporation.

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