CA Inter P6 · Chapter 6 · Question 2 of 9
A company has EBIT of ₹ 10,00,000, debenture interest of ₹ 2,50,000 and preference dividend of ₹ 1,40,000. The tax rate is 30%. The degree of financial leverage is (to two decimals):
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) 1.82
Explanation
Preference dividend is paid out of post-tax profit, so it is grossed up: ₹ 1,40,000 / (1 - 0.30) = ₹ 2,00,000. DFL = EBIT / [EBIT - I - PD/(1 - t)] = ₹ 10,00,000 / (₹ 10,00,000 - ₹ 2,50,000 - ₹ 2,00,000) = ₹ 10,00,000 / ₹ 5,50,000 = 1.82. Ignoring preference dividend gives 1.33, and not grossing it up gives 1.64.
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