CA Intermediate · Financial Management and Strategic Management · Financing Decisions - Leverages
Rohini Traders has contribution of Rs 12,00,000, and EBIT of Rs 4,00,000. Its interest burden is Rs 1,00,000. What is the degree of combined leverage?
The degree of combined leverage is 4.0. It equals contribution divided by earnings before tax, which is Rs 12,00,000 divided by Rs 3,00,000. This is also the product of operating leverage 3 and financial leverage 1.33.
- A3.0
- B1.33
- C4.0Correct
- D2.0
Explanation
DOL = Contribution/EBIT = 12,00,000/4,00,000 = 3. EBT = 4,00,000 - 1,00,000 = 3,00,000, so DFL = 4,00,000/3,00,000 = 1.33. DCL = 3 x 1.33 = 4.0, which equals Contribution/EBT = 12,00,000/3,00,000 = 4. The option 3.0 is only DOL.
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