CS Executive · Corporate Accounting and Financial Management · Operational Approach to Financial Decision
Kaveri Industries has EBIT of ₹5,00,000 and interest on debt of ₹2,00,000. There is no preference capital. What is its degree of financial leverage (DFL)?
The degree of financial leverage is about 1.67. It is EBIT of ₹5,00,000 divided by profit before tax of ₹3,00,000 (EBIT less interest of ₹2,00,000), showing how much EPS changes for each percentage change in EBIT.
- A2.5
- B1.67Correct
- C1.4
- D0.6
Explanation
DFL = EBIT / (EBIT − Interest) = 5,00,000 / 3,00,000 = 1.67. The value 2.5 results from dividing EBIT by interest, which is the coverage ratio and not DFL. The value 0.6 is the reciprocal of 1.67.
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