CMA Intermediate · Financial Management and Business Data Analytics · Leverage Analyses and EBIT - EPS Analysis
Kaveri Textiles has EBIT of ₹4,00,000 and interest expense of ₹1,00,000, with no preference dividend. What is its degree of financial leverage (DFL)?
DFL is 1.33. It is EBIT of ₹4,00,000 divided by EBT of ₹3,00,000 after deducting ₹1,00,000 interest. The inverted ratio 0.75 is incorrect because DFL measures EBIT relative to profit after interest.
- A1.33Correct
- B0.75
- C4.00
- D1.25
Explanation
EBT = 4,00,000 - 1,00,000 = 3,00,000. DFL = EBIT/EBT = 4,00,000/3,00,000 = 1.33. Using EBT/EBIT gives 0.75, which is inverted.
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