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

Sahyadri Foods Ltd has sales of Rs 20,00,000, variable cost of Rs 12,00,000 and fixed operating cost of Rs 4,00,000. It has 10% debentures of Rs 10,00,000 outstanding. What is its degree of financial leverage?

Degree of financial leverage is 1.33. EBIT is Rs 4,00,000 after deducting fixed cost from contribution of Rs 8,00,000. Interest is Rs 1,00,000, so EBT is Rs 3,00,000. DFL is EBIT divided by EBT, which is 4,00,000 / 3,00,000, or 1.33.

  1. A2.00Correct
  2. B1.33
  3. C1.60
  4. D1.00

Explanation

Contribution = 20,00,000 - 12,00,000 = 8,00,000. EBIT = 8,00,000 - 4,00,000 = 4,00,000. Interest = 10% of 10,00,000 = 1,00,000. EBT = 3,00,000. DFL = EBIT/EBT = 4,00,000/3,00,000 = 1.33. Wait: this equals 1.33, so the key is the 1.33 option.

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