Pirates, Inc. is examining two different financing strategies (1) 50% debt and 50% equity, and (2) 75% debt and 25% equity. At 750 units produced and sold, the ROE is the same for both financing methods. The point at which 750 units are produced and sold is best described as the:
A) ROE equality.
B) indifference point.
C) EPS indifference point.
D) finance flexibility point.

Question

Quizplus · Accepted Answer

The point at which the Return on Equity (ROE) is the same for two different financing methods (in this case, 50% debt and 50% equity versus 75% debt and 25% equity) at a specific level of production and sales (750 units) is known as the indifference point. This term is used because at this point, the company is indifferent between the two financing options as they provide the same ROE.