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CMA Intermediate · Financial Management and Business Data Analytics · Leverage Analyses and EBIT - EPS Analysis

Kaveri Foods Ltd has EBIT of ₹12,00,000, interest of ₹4,00,000 and 40,000 equity shares. There is no tax. If EBIT rises by 10%, what will be the percentage increase in EPS?

The increase in EPS is 15%. DFL equals EBIT over EBT, that is 12,00,000 divided by 8,00,000, or 1.5. Multiplying the 10% rise in EBIT by 1.5 gives a 15% rise in EPS, as interest stays fixed.

  1. A10%
  2. B15%Correct
  3. C20%
  4. D30%

Explanation

DFL = 12,00,000 / (12,00,000 - 4,00,000) = 1.5. Percentage change in EPS = 1.5 x 10% = 15%. Check: EBT rises from 8,00,000 to 9,20,000, which is 1,20,000/8,00,000 = 15%. The 30% option wrongly uses EBIT/Interest = 3.

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