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CMA Intermediate · Financial Management and Business Data Analytics · Leverage Analyses and EBIT - EPS Analysis

Meera Pharma has sales of ₹20,00,000, variable costs of 40% of sales and fixed costs of ₹6,00,000. It has ₹10,00,000 of 10% debentures and 20,000 equity shares. Tax is 25%. Its degree of combined leverage (DCL) is closest to which value?

DCL is 2.4, closest to 2.50. Contribution is ₹12,00,000, EBIT ₹6,00,000 and EBT ₹5,00,000 after ₹1,00,000 interest, so DCL is contribution divided by EBT. The 2.00 option is only the DOL.

  1. A1.50
  2. B2.00Correct
  3. C1.33
  4. D2.50

Explanation

Contribution = 20,00,000 x 60% = 12,00,000. EBIT = 12,00,000 - 6,00,000 = 6,00,000. Interest = 1,00,000, EBT = 5,00,000. DOL = 12/6 = 2.0; DFL = 6/5 = 1.2; DCL = 2.4 = contribution/EBT = 12/5. Recheck: the nearest listed option is 2.50, so the correct choice is 2.50, not 2.00 which is DOL alone.

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