CA Intermediate · Financial Management and Strategic Management · Financing Decisions - Leverages
A company has EBIT of Rs 5,00,000 and interest of Rs 2,00,000. If EBIT falls by 20%, by what percentage will EBT fall?
EBT will fall by 33.33%. Financial leverage is EBIT of Rs 5,00,000 divided by EBT of Rs 3,00,000, about 1.667. Multiplying by the 20% fall in EBIT gives 33.33%, confirmed by new EBT of Rs 2,00,000.
- A20%
- B33.33%Correct
- C50%
- D25%
Explanation
DFL = EBIT/EBT = 5,00,000/3,00,000 = 1.667. A 20% fall in EBIT lowers EBT by 1.667 x 20% = 33.33%. Check: new EBIT 4,00,000, EBT 2,00,000, a fall of 1,00,000 on 3,00,000 = 33.33%.
Did you get it right without looking?
One question tells you little. A timed set on Financing Decisions - Leverages shows your real accuracy, how long you take and where you lose marks.
More Financing Decisions - Leverages questions
- A firm's contribution is exactly equal to its fixed operating costs, and it has no interest. Which statement about its Degree of Operating L…
- A firm has contribution of Rs 9,00,000, fixed operating costs of Rs 6,00,000 and interest of Rs 1,50,000. If sales fall by 10%, by what perc…
- Kaveri Ltd has EBIT of ₹5,00,000. Its capital structure includes 10% debentures of ₹10,00,000 and no other fixed financing charge. What is i…
- Kaveri Ltd has a DOL of 2.5 and a DFL of 1.6 at the current level of output. If sales are expected to rise by 10%, by what percentage will E…
- Mehta Industries sells 10,000 units at ₹100 per unit. Variable cost is ₹60 per unit and fixed operating cost is ₹2,00,000. Interest is ₹1,00…
- Kaveri Industries has a DOL of 3 and a DFL of 2. If sales rise by 8%, what is the expected percentage increase in earnings per share, assumi…