CS Executive · Corporate Accounting and Financial Management · Operational Approach to Financial Decision
Vihaan Ltd has EBIT of ₹8,00,000 and interest of ₹2,00,000. What is its financial leverage (degree of financial leverage, DFL) at this level?
The degree of financial leverage is 1.33. It is EBIT divided by EBT: ₹8,00,000 divided by ₹6,00,000 after deducting ₹2,00,000 interest. The figure 4 is the interest coverage ratio, a different measure.
- A1.33Correct
- B4.00
- C1.25
- D0.75
Explanation
DFL = EBIT / (EBIT − Interest) = 8,00,000 / 6,00,000 = 1.33. The 4.00 option is EBIT divided by interest, which is the interest coverage ratio and not DFL. Hence 1.33 is correct.
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