Dynamic Financial Breakeven, Size Effect, Levered Beta, and the Optimal Capital Structure (OCS) Curve

Abstract

Classical financial breakeven analysis in terms of EBIT (earnings before interest and tax) and EPS (earning per share) or ROI (return on equity), or any other profit measures is just a fudge. The present study first shows the famous “nonsense” of the classical financial breakeven analysis and proposes a dynamic financial break-even analysis based on size effect and leverage effect. The proposed model then derives an optimal capital structure curve in terms of EPS and ROI at different levels of EBIT. The model has been used in real-life situations by three large manufacturing organizations that are listed on Dhaka Stock Exchange.