CA Intermediate · Financial Management and Strategic Management · Financing Decisions - Leverages
Aarav Ltd has EBIT of ₹5,00,000 and interest of ₹1,00,000 on its debt. There is no preference capital. What is its degree of financial leverage (DFL)?
The degree of financial leverage is 1.25. EBIT of ₹5,00,000 less interest of ₹1,00,000 gives EBT of ₹4,00,000, and DFL is EBIT divided by EBT, which equals 1.25.
- A1.20
- B1.25Correct
- C1.50
- D5.00
Explanation
EBT = 5,00,000 − 1,00,000 = ₹4,00,000. DFL = EBIT / EBT = 5,00,000 / 4,00,000 = 1.25. Option 1.20 results from wrongly dividing by something other than EBT, and 5.00 divides EBIT by interest.
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