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ABFM MODULE - B
Chapter 8: Financial and Operating Leverages (PART-IV)
What we will study?
*How to calculate DFL?
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Example 1:
A firm's details are as under:
➢ Sales (@100 per unit) Rs. 24,00,000.
➢ Variable Cost 50%.
➢ Fixed Cost Rs. 10,00,000.
➢ It has borrowed Rs. 10,00,000 @ 10% p.a. and its equity
share capital is Rs. 10,00,000 (Rs. 100 each).
➢ Consider tax @ 50%.
Calculate its Degree of Financial Leverage.
SOLUTION:
➢ Variable cost (50% of Sales) = 50% of 24,00,000
= 12,00,000

➢ It has borrowed Rs. 10,00,000 @ 10% p.a.

So, Interest = 10% of 10,00,000 = 1,00,000

➢ its equity share capital is Rs. 10,00,000 (Rs. 100 each)

𝟏𝟎,𝟎𝟎,𝟎𝟎𝟎
So, Number of shares = = 10,000
𝟏𝟎𝟎
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Sales 24,00,000
Less: Variable cost (50% of Sales) 12,00,000
Contribution 12,00,000
Less: Fixed cost 10,00,000
EBIT 2,00,000
Less: Interest 1,00,000
EBT 1,00,000
Less: Tax (50%) 50,000
EAT 50,000
No. of equity shares 10,000
EPS 5

𝐄𝐀𝐓 𝟓𝟎,𝟎𝟎𝟎
EPS = 𝐍𝐨 = =5
𝐨𝐟 𝐞𝐪𝐮𝐢𝐭𝐲 𝐬𝐡𝐚𝐫𝐞 𝟏𝟎,𝟎𝟎𝟎

𝐄𝐁𝐈𝐓 𝟐,𝟎𝟎,𝟎𝟎𝟎
Degree of Financial Leverage (DFL) = = 𝟏,𝟎𝟎,𝟎𝟎𝟎 = 2 times
𝐄𝐁𝐓
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Example 2:
The following information is related to XYZ Company Ltd. for
the year ended 31st March, 2022:
Equity share capital (of Rs. 10 each) Rs. 50 lakhs
12% Bonds of Rs. 1,000 each Rs. 37 lakhs
Sales Rs. 84 lakhs
Fixed cost (excluding interest) Rs. 6.96 lakhs
Profit-volume Ratio 27.55%
Income Tax Applicable 40%
Calculate its Degree of Financial Leverage?
SOLUTION:
➢ Equity share capital (of Rs. 10 each) = Rs. 50 lakhs
𝟓𝟎,𝟎𝟎,𝟎𝟎𝟎
So, Number of shares = = 5,00,000
𝟏𝟎

➢ 12% Bonds of Rs. 1,000 each = Rs. 37 lakhs

So, Interest on Bond = 12% of 37,00,000 = 4,44,000

➢ Contribution = Sales × P/V ratio = 84 Lac * 27.55% =

23,14,200
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Particulars Amount (Rs.)
Sales 84,00,000
Contribution (Sales × P/V ratio) 23,14,200
Less: Fixed cost (excluding Interest) (6,96,000)
EBIT 16,18,200
Less: Interest on debentures (4,44,0000)
(12% Rs.37 lakhs)
EBT 11,74,200
Less: Tax (40%) 4,69,680
EAT 7,04,520
No. of equity shares 5,00,000

𝐄𝐀𝐓 𝟕,𝟎𝟒,𝟓𝟐𝟎
EPS = 𝐍𝐨 = = 1.41
𝐨𝐟 𝐞𝐪𝐮𝐢𝐭𝐲 𝐬𝐡𝐚𝐫𝐞 𝟓,𝟎𝟎,𝟎𝟎𝟎

𝐄𝐁𝐈𝐓
Degree of Financial Leverage (DFL) = 𝐄𝐁𝐓
𝟏𝟔,𝟏𝟖,𝟐𝟎𝟎
= 𝟏𝟏,𝟕𝟒,𝟐𝟎𝟎 = 1.38 times