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

Nair Components Ltd has a DOL of 2 and a DFL of 3 at present. Its EBIT is ₹4,00,000 and the firm pays no preference dividend. Its fixed operating costs are ₹4,00,000. If sales rise by 10%, what will be the percentage increase in EPS, and what is the current interest burden?

DCL is 2 x 3 = 6, so a 10% sales rise lifts EPS by 60%. DFL of 3 means EBT is one third of EBIT, about ₹1,33,333, so interest is ₹2,66,667.

  1. A20% increase in EPS; interest ₹2,00,000
  2. B60% increase in EPS; interest ₹2,66,667
  3. C60% increase in EPS; interest ₹2,00,000Correct
  4. D50% increase in EPS; interest ₹1,33,333

Explanation

DCL = 2 x 3 = 6, so EPS rises 6 x 10% = 60%. DFL = EBIT/(EBIT - I) = 3 gives EBT = 4,00,000/3 = 1,33,333, so interest = 4,00,000 - 1,33,333 = 2,66,667. Check DOL: contribution = 4,00,000 + 4,00,000 = 8,00,000; 8,00,000/4,00,000 = 2, consistent. So the correct interest is ₹2,66,667 and the correct option is the one with 60% and 2,66,667.

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