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

Malabar Textiles Ltd has a degree of operating leverage of 3 and a degree of financial leverage of 1.5. Its present sales are ₹20,00,000 and EPS is ₹8. If sales rise by 10%, what will be the new EPS, assuming no change in the number of shares?

New EPS will be ₹11.60. Combined leverage is 3 x 1.5 = 4.5, so a 10% rise in sales lifts EPS by 45%. Applying that to the present EPS of ₹8 gives ₹11.60.

  1. A₹10.00
  2. B₹11.60Correct
  3. C₹11.00
  4. D₹12.40

Explanation

DCL = 3 x 1.5 = 4.5. EPS rises by 10% x 4.5 = 45%. New EPS = 8 x 1.45 = ₹11.60. Check: EBIT rises 30%, EPS rises 1.5 x 30% = 45%, confirming. Using only DOL gives 30% and ₹10.40, while ₹10.00 is not derived from the correct combined leverage.

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