Question
A firm has sales of Rs. 50,00,000, variable costs of Rs.
30,00,000, and fixed costs of Rs. 10,00,000. It has debt of Rs. 20,00,000 at 10% interest. What is the Degree of Financial Leverage (DFL) at EBIT level?Solution
EBIT = Sales – Variable costs– Fixed costs = 50,00,000- 30,00,000 – 10,00,000 = ₹10,00,000; DFL = EBIT ÷ (EBIT – Interest). = 10,00,000 ÷ (10,00,000 – 2,00,000) = 10,00,000 ÷ 8,00,000 = 1.25.
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