Corporate Finance Q102

102Soma Autos employs debt financing, borrowing at a rate of 10%. The interest cost at this rate equals Rs.65 billion. For 8 million cars, what is the degree of financial leverage (DFL) for Soma given revenue per car is Rs.25,000, variable cost per car is Rs.14,000 and fixed costs equal Rs.15 billion?

Option : B
Explanation : Operating income for 8 million cars = 8 million (25,000 – 14,000) – 15 billion = 73 billion. DFL = [Q(P - V) - F] / [Q(P - V) - F - C] = (Rs.73 billion) / (Rs.73 billion – Rs.65 billion) = 9.13.

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