CA Inter P6 · Chapter 6 · Question 4 of 9
Sunrise Ltd has a degree of combined leverage of 4 and a degree of operating leverage of 2.5. Its EBIT is ₹ 8,00,000 and it has no preference shares. Its annual interest charge is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) ₹ 3,00,000
Explanation
DFL = DCL / DOL = 4 / 2.5 = 1.6. DFL = EBIT / EBT, so EBT = ₹ 8,00,000 / 1.6 = ₹ 5,00,000. Interest = EBIT - EBT = ₹ 8,00,000 - ₹ 5,00,000 = ₹ 3,00,000. The figure ₹ 5,00,000 is EBT, not interest.
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