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

Arjun Ltd has a DOL of 2.5 and a DFL of 1.6. Its current EPS is ₹10 and sales are expected to fall by 10%. Assuming no change in the number of shares, what will be the expected EPS?

Expected EPS is ₹6.00. Combined leverage is 2.5 times 1.6, which is 4. A 10% fall in sales therefore reduces EPS by 40%, so the current EPS of ₹10 falls to ₹6.00.

  1. A₹6.00Correct
  2. B₹9.00
  3. C₹7.50
  4. D₹4.00

Explanation

DCL = 2.5 × 1.6 = 4. A 10% fall in sales causes a 4 × 10 = 40% fall in EPS. New EPS = 10 × (1 − 0.40) = ₹6.00. Option ₹4.00 wrongly applies a 60% fall, and ₹7.50 uses only DOL-type 25% fall.

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