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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Financial Management

Case: Rohan Textiles Ltd has 10 lakh shares, EBIT of ₹30 lakh next year, and ₹100 lakh of 10% debt outstanding. The tax rate is 25%. It uses a policy of comparing financial leverage. What is its degree of financial leverage (DFL), and what does it imply if EBIT rises 10%?

Interest is ₹10 lakh, so DFL equals 30 divided by 20, which is 1.5. A 10% rise in EBIT therefore raises EPS by about 15%. Tax does not change the DFL ratio here because it applies proportionally.

  1. ADFL 1.50; EPS rises about 15%
  2. BDFL 1.33; EPS rises about 13.3%Correct
  3. CDFL 1.50; EPS rises about 10%
  4. DDFL 1.20; EPS rises about 12%

Explanation

Interest = 10% × 100 = ₹10 lakh. DFL = EBIT/(EBIT − Interest) = 30/20 = 1.5. EPS rises 1.5 × 10% = 15%. Check: PBT 20, PAT 15; with EBIT 33, PBT 23, PAT 17.25; rise = 15%. So the correct option is DFL 1.50 with 15% rise.

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