Skip to content

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

Kaveri Ltd has EBIT of ₹5,00,000. Its capital structure includes 10% debentures of ₹10,00,000 and no other fixed financing charge. What is its Degree of Financial Leverage (DFL)?

DFL is 1.25. Interest on the ₹10,00,000 debentures at 10% is ₹1,00,000, so earnings before tax are ₹4,00,000. DFL is EBIT divided by EBT, which is 5,00,000 divided by 4,00,000, giving 1.25.

  1. A1.00
  2. B1.20
  3. C1.25Correct
  4. D2.00

Explanation

Interest = 10% × 10,00,000 = 1,00,000. EBT = 5,00,000 − 1,00,000 = 4,00,000. DFL = EBIT/EBT = 5,00,000/4,00,000 = 1.25. Option 1.20 wrongly takes EBIT/(EBIT − 1.2 × interest) type error; 2.00 wrongly takes EBIT divided by interest ... actually 5 times, not 2, so the main error is using EBIT/(EBIT−interest×2).

Did you get it right without looking?

One question tells you little. A timed set on Financing Decisions - Leverages shows your real accuracy, how long you take and where you lose marks.

Practise Financing Decisions - LeveragesFree diagnostic mock

More Financing Decisions - Leverages questions