A firm has sales of 75,00,000, variable cost of 42,00,000 and fixed cost of 6,00,000. It has a debt of 45,00,000 at 9% and equity of 55,00,000. Does…

CA Intermediate · Financial Management and Strategic Management · RTP · September 2024
A firm has sales of 75,00,000, variable cost of 42,00,000 and fixed cost of 6,00,000. It has a debt of 45,00,000 at 9% and equity of 55,00,000. Does it have favourable financial leverage?
(A) ROI is less than interest on loan funds and hence it has no favourable financial leverage.
(B) ROI is equal to interest on loan funds and hence it has favourable financial leverage.
(C) ROI is greater than interest on loan funds and hence it has favourable financial leverage.
(D) ROI is greater than interest on loan funds and hence it has unfavourable financial leverage.

Suggested Answer and Working Notes:

Correct Answer: Option (C)

ROI is greater than interest on loan funds and hence it has favourable financial leverage.

Topics: Part-A: Financial Management

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