CS Executive · Corporate Accounting and Financial Management · Capital Structure
Mehta Industries has EBIT of Rs 600,000 and interest expense of Rs 200,000. It has no preference shares. What is its degree of financial leverage (DFL)?
The degree of financial leverage is 1.50. DFL equals EBIT divided by profit before tax, i.e. 600,000 divided by 400,000 after deducting interest of Rs 200,000. This shows a 1% change in EBIT changes EPS by 1.5%.
- A1.50Correct
- B3.00
- C0.67
- D2.00
Explanation
DFL = EBIT/(EBIT - Interest) = 600,000/(600,000-200,000) = 600,000/400,000 = 1.5. Using 600/200 gives 3.00, which wrongly divides EBIT by interest.
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