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    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?
    A 1.25 Correct Answer Incorrect Answer
    B 1.50 Correct Answer Incorrect Answer
    C 2.00 Correct Answer Incorrect Answer
    D 2.50 Correct Answer Incorrect Answer
    E 3.00 Correct Answer Incorrect Answer

    Solution

    EBIT = Sales тАУ Variable costsтАУ Fixed costs = 50,00,000- 30,00,000 тАУ 10,00,000 = тВ╣10,00,000; DFL = EBIT ├╖ (EBIT тАУ Interest). = 10,00,000 ├╖ (10,00,000 тАУ 2,00,000) = 10,00,000 ├╖ 8,00,000 = 1.25.

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