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CS Executive · Corporate Accounting and Financial Management · Capital Structure

Kaveri Ltd has a DOL of 2.5 and a DFL of 1.6. If its sales rise by 10% (and fixed costs and interest stay unchanged), what is the expected percentage change in EPS?

EPS is expected to rise by 40%. Combined leverage is the product of operating and financial leverage, 2.5 x 1.6 = 4.0. A 10% rise in sales is therefore magnified four times, giving a 40% rise in EPS.

  1. A25%
  2. B16%
  3. C40%Correct
  4. D41%

Explanation

Combined leverage DCL = DOL x DFL = 2.5 x 1.6 = 4.0. Percentage change in EPS = 4.0 x 10% = 40%. 25% uses DOL alone and 16% uses DFL alone; 41% wrongly adds the leverages (2.5+1.6=4.1).

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