Question 8.5: The information for Semplice Ltd in Example 8.4 can be used ...

Financial Management for Decision Makers

The information for Semplice Ltd in Example 8.4 can be used to illustrate how the indifference point is calculated.

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Let x be the profit before interest and taxation (PBIT) at which the two financing options provide the same EPS.

	Shares	Loan notes
	£m	£m
Profit before interest and taxation	x	x
Interest payable	$\underline{(2.4)}$	$\underline{(4.4)}$
Profit before taxation	(x − 2.4)	(x − 4.4)
Tax (25%)	$\underline{0.25 (x − 2.4)}$	$\underline{0.25 (x − 4.4 )}$
Profit after taxation	$\underline{0.75 (x − 2.4)}$	$\underline{0.75 (x − 4.4 )}$
EPS	$\frac{0.75(x − £2.4m)}{68m}$	$\frac{0.75(x − £4.4m)}{60m}$

Thus, the EPS of the two financing options will be equal when:

$\frac{0.75(x − £2.4m)}{68m} =\frac{0.75(x − £4.4m)}{60m}$

We can solve this equation as follows:

45x – £108m = 51x – £224.4m
6x = £116.4m
$x=\underline{£ 19.4 m}$

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