CA Inter P6 · Chapter 6 · Question 3 of 9
A firm has a degree of operating leverage of 2 and a degree of financial leverage of 1.5. If sales increase by 10%, earnings per share will increase by:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) 30%
Explanation
Degree of combined leverage = DOL x DFL = 2 x 1.5 = 3. EPS changes by DCL x % change in sales = 3 x 10% = 30%. A 20% increase would be the change in EBIT only (DOL x 10%). Adding the leverages (3.5 x 10%) gives 35%, which is wrong because they multiply.
More Financing Decisions – Leverages MCQs
- Q5Operating leverage arises because of:
- Q6A company pays annual debenture interest of ₹ 3,00,000 and preference dividend of ₹ 70,000. The tax rate is 30%. Its financial break-even…
- Q7When a firm operates exactly at its operating break-even point, its degree of operating leverage is:
- Q8Nandini Ltd has a contribution of ₹ 20,00,000 and a degree of operating leverage of 2.5. Its fixed operating costs are:
- Q9A firm with a high degree of operating leverage and a high degree of financial leverage is best described as: