6. Financial Leverage Indifference Point

XYZ company is considering two different levels of debt and equity financing.

Option LFL uses low financial leverage and option HFL uses high financial leverage.

Cost of debt (Kd) is 8% and the corporate tax rate (t) is 21 percent

Share price, shares outstanding, and debt financing for both options are shown in the table below:

LFL HFL

Equity Value (E) $800,000 $400,000

Debt Value (D) $200,000 $600,000

Shares outstanding 1,000,000 500,000

1. What is the indifference point level of EBIT using the EPS formula?
2. What is EPS at this point?
3. What is the indifference point level of EBIT using the ROE formula?
4. What is ROE?
5. Draw and completely label the EBIT-EPS (or ROE) graph!