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

Sundaram Textiles Ltd has EBIT of ₹8,00,000 and annual interest on debentures of ₹2,00,000. There is no preference dividend. What is its Degree of Financial Leverage (DFL)?

DFL is EBIT divided by EBT. EBT is 8,00,000 minus 2,00,000, which equals 6,00,000. Dividing 8,00,000 by 6,00,000 gives 1.33. So a 1% change in EBIT changes EPS by about 1.33%.

  1. A1.25
  2. B1.33Correct
  3. C4.00
  4. D0.75

Explanation

DFL = EBIT / (EBIT - Interest) = 8,00,000 / (8,00,000 - 2,00,000) = 8,00,000 / 6,00,000 = 1.33. The option 1.25 wrongly uses EBIT/(EBIT+Interest)... actually it reflects dividing by a wrong base, and 4.00 is EBIT/Interest, which is the interest coverage ratio, not DFL.

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