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

Rohan Ltd has a DFL of 2 at EBIT of ₹5,00,000. It has no preference shares and interest is fixed. If EBIT falls to ₹3,00,000, what will be the EBT?

EBT would be ₹50,000, since interest works out to ₹2,50,000 from DFL of 2 at EBIT ₹5,00,000.

  1. A₹1,00,000Correct
  2. B₹2,00,000
  3. C₹3,00,000
  4. D₹0

Explanation

DFL = EBIT/EBT = 2, so EBT = 2,50,000 and interest = 5,00,000 − 2,50,000 = ₹2,50,000. At EBIT 3,00,000, EBT = 3,00,000 − 2,50,000 = ₹50,000. None of the listed values equals this, so recheck: the correct option must be ₹50,000, which is not offered; the closest reasoned choice is ₹1,00,000 only if interest were ₹2,00,000.

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