CA Intermediate · Financial Management and Strategic Management · Financing Decisions - Leverages
Aarav Ltd has a DOL of 3 and a DFL of 1.5. If sales are expected to increase by 8%, what is the expected percentage increase in EPS?
EPS is expected to rise by 36%. Degree of combined leverage is DOL multiplied by DFL, 3 x 1.5 = 4.5, and a sales increase of 8% therefore magnifies to an EPS increase of 4.5 x 8 = 36%.
- A12%
- B24%
- C27%
- D36%Correct
Explanation
Combined leverage = DOL x DFL = 3 x 1.5 = 4.5. Percentage change in EPS = 4.5 x 8% = 36%. Using DOL alone gives 24%, which ignores the financial leverage effect.
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