CA Intermediate · Financial Management and Strategic Management · Financing Decisions - Leverages
Aarav Ltd has EBIT of ₹6,00,000, and interest on debt of ₹1,50,000. Its Degree of Financial Leverage (DFL) is:
The Degree of Financial Leverage is 1.33. It is EBIT of ₹6,00,000 divided by EBT of ₹4,50,000, where EBT is EBIT less interest of ₹1,50,000. It shows the percentage change in EPS for a 1% change in EBIT.
- A1.25
- B1.33Correct
- C1.50
- D4.00
Explanation
EBT = 6,00,000 - 1,50,000 = ₹4,50,000. DFL = EBIT/EBT = 6,00,000/4,50,000 = 1.33. Using 6,00,000/4,00,000 style errors or dividing by interest gives 4.00, which is wrong.
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