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396 Corporate Finance BRILLIANT’S

EBIT 2,50,000 6,12,500 1,25,000
Less: Interest 25,000 40,000 Nil
EBT 2,25,000 5,72,500 1,25,000

Contribution
(i) Degree of Operating Leverage (DOL) 
EBIT

6,00,000 13,12,500 2,00,000
P Ltd.   2.4 Q Ltd.   2.14 R Ltd.   1.6
2,50,000 6,12,500 1,25,000

EBIT
(ii) Degree of Financial Leverage (DFL) 
EBT

2,50,000 6,12,500 1,25,000
P Ltd.   1.1 Q Ltd.   1.07 R Ltd.   1
2,25,000 5,72,500 1,25,000
(iii) Degree of Combined Leverage (DCL) = DOL × DFL


P Ltd. 2.4 1.1 2.64   Q Ltd.  2.14 1.07  2.29 R Ltd. 1.6 1 1.6  
Illustration 4.3.7
The company’s total assets turnover ratio is 5, its fixed operation costs are ` 1,50,000 and its
variable operating cost ratio is 50%. The income tax rate is 40%. For the company calculate the
different types of leverages. Given that the face value of the share is ` 20.
H§$nZr H$m Hw$b AgoQ²>g Q>Z©Amoda aoemo 5 h¡, BgH$s {’$³ñS> Am°naoeZ H$m°ñQ²>g < 1,50,000 h¡ VWm BgH$s
do[aE~b Am°naoqQ>J H$m°ñQ> aoemo 50% h¡& B§H$‘ Q>¡³g aoQ> 40% h¡& H§$nZr Ho$ {bE brdaoO Ho$ {d{^ÝZ àH$mam| H$s JUZm
H$s{OE& {X¶m J¶m h¡ {H$ eo¶a H$s ’o$g d¡ë¶y <20 h¡&

Liabilities Amount Assets Amount
(bm¶{~{bQ>rO) (am{e) (AgoQ²>g) (am{e)
` `

Equity Share Capital Fixed Assets / {’$³ñS> AgoQ²>g 1,80,000
B{³dQ>r eo¶a H¡${nQ>b 70,000 Current Assets / H$a§Q> AgoQ²>g 50,000
Retained Earnings / [aQ>|S> A{Zª½g 30,000
10% of Long-term Debt
bm°ÝJ Q>‘© S>oãQ> 10% 90,000
Current Liabilities / H$a§Q> bm¶{~{bQ>rO 40,000
2,30,000 2,30,000