NISM Certifications · NISM-Series-XV: Research Analyst · Company Analysis - Financial Analysis
A company has EBIT of ₹200 crore and interest expense of ₹50 crore. Sales fall such that EBIT drops by 20%, while interest is unchanged. By what percentage does profit before tax fall?
Profit before tax falls by about 26.7 percent. Initially PBT is 150 crore (200 less 50 interest). After a 20 percent EBIT fall to 160 crore, PBT is 110 crore, a drop of 40 crore, which is 26.7 percent of 150 crore, because fixed interest magnifies the decline.
- A20%
- B26.7%Correct
- C40%
- D16%
Explanation
Initial PBT = 200 - 50 = 150. New EBIT = 160, so PBT = 110. Fall = 40/150 = 26.7%. Financial leverage (DOL on EBIT = 200/150 = 1.333) magnifies the 20% fall to 26.7%. 20% ignores leverage; 40% is the fall in rupee crore, not a percentage.
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