The earnings per share, ‘equivalent point’ or ‘point of indifference’ refers to that EBIT, level at which EPS remains the same irrespective of Different alternatives of Debt-Equity mix. At this level of EBIT, the rate of return on capital employed is equal to the cost of debt and this is also known as the break-even level of EBIT for alternative financial plans
CG means the ratio between the various types of securities in the capital structure of the company. A company is said to e high-gear when it has proportionately higher/larger issue of Debt and PS for raising the LT resources. Whereas low-gear stands for a proportionately large issue of equity shares.
Leverage-an Increased means of accomplishing some purpose
In financial management, it is the firms ability to use fixed cost assets or funds to increase the returns to its owners;
Financial leverage- the use of long term fixed income bearing debt and preference share capital along with the equity share capital is called financial leverage or trading on equity
A Firm is known to have a favourable leverage if its earnings are more than what debt would cost. On the contrary, if it does not earn as much as the debt costs then it will be known as an unfavourable leverage.
When the d/f b/w the earnings from assets financed by fixed cost funds and cost of these funds are distributed to the equity stockholders, they will get additional earnings without increasing their own investment. Consequently, the EPS and the Rate of return on ESC will go up.
On the contrary, if the firm acquires fixed cost funds at a higher cost than the earnings from those assets then the EPS and return on equity capital will decrease.