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

Kaveri Industries has a DOL of 3 and a DFL of 2. If sales rise by 8%, what is the expected percentage increase in earnings per share, assuming no change in the number of shares?

EPS is expected to rise by 48%. Combined leverage equals DOL times DFL, which is 3 × 2 = 6, and an 8% rise in sales is magnified six times to a 48% rise in earnings per share.

  1. A16%
  2. B24%
  3. C48%Correct
  4. D11%

Explanation

Degree of combined leverage = DOL × DFL = 3 × 2 = 6. EPS change = 6 × 8% = 48%. Option 24% uses only DOL, and 16% uses only DFL; 11% simply adds the leverages (5) and some other figure.

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