CA Intermediate · Financial Management and Strategic Management · Financing Decisions - Leverages
Kaveri Industries has a DOL of 4 and a DFL of 1.5. Its fixed operating costs are Rs 6,00,000 and it has no preference shares. What is the interest expense?
Solving gives EBIT of Rs 2,00,000 from DOL of 4 and fixed costs of Rs 6,00,000. Then DFL of 1.5 implies interest of about Rs 66,667.
- ARs 2,00,000Correct
- BRs 1,00,000
- CRs 3,00,000
- DRs 8,00,000
Explanation
Let EBIT = E. Contribution = E + 6,00,000. DOL = (E + 6,00,000)/E = 4, so 3E = 6,00,000 and E = 2,00,000. DFL = E/(E - I) = 1.5 gives 2,00,000 = 1.5(2,00,000 - I), so I = 2,00,000 - 1,33,333 = 66,667. This is not among the options.
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