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CA Intermediate · Financial Management and Strategic Management · Financing Decisions - Leverages

Anand Textiles has EBIT of ₹6,00,000 and interest expense of ₹2,00,000. It has no preference shares. What is its Degree of Financial Leverage (DFL)?

DFL is 1.50. Degree of Financial Leverage equals EBIT divided by EBT. EBT is ₹4,00,000 after deducting interest of ₹2,00,000 from EBIT of ₹6,00,000, so DFL is 6,00,000 divided by 4,00,000, which is 1.50.

  1. A1.33
  2. B1.50Correct
  3. C2.00
  4. D3.00

Explanation

EBT = 6,00,000 − 2,00,000 = ₹4,00,000. DFL = EBIT/EBT = 6,00,000/4,00,000 = 1.50. Option 3.00 comes from dividing EBIT by interest, which is the interest coverage ratio, not DFL.

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