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CMA Intermediate · Financial Management and Business Data Analytics · Capital Structure and Capital Stacking

Rohit Auto Ltd has EBIT of Rs 8,00,000 and 10% debt of Rs 10,00,000. It has 1,00,000 equity shares and the tax rate is 25%. What is its EPS, and what is its degree of financial leverage (DFL)?

EPS is Rs 5.25 and DFL is about 1.14. Interest is Rs 1,00,000, so EBT is Rs 7,00,000 and profit after 25% tax is Rs 5,25,000, giving Rs 5.25 on 1,00,000 shares. DFL equals EBIT divided by EBT, which is 8/7.

  1. AEPS Rs 5.25; DFL 1.00
  2. BEPS Rs 5.25; DFL 1.14Correct
  3. CEPS Rs 5.25; DFL 1.25
  4. DEPS Rs 7.00; DFL 1.14

Explanation

Interest = 10% x 10,00,000 = 1,00,000. EBT = 7,00,000; tax at 25% = 1,75,000; PAT = 5,25,000; EPS = Rs 5.25. DFL = EBIT/EBT = 8,00,000/7,00,000 = 1.14. Rs 7.00 would be EPS before tax.

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