Financing Decisions - Leverages

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. 30 original practice MCQs, 2 marks each. Practice and separate-test stems differ. Standalone drills across the chapter, with a separate case-based test pack.

Original practice, not official ICAI questions or suggested answers. Scores are temporary and not synced to Study Hub. Contract/current-rule/accounting/tax boundaries are included in the review pack.

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FM-C06-P001 · 2 marks

Uncertain demand and input costs affect EBIT before any financing choice. Primary risk category?

A. Only share-count dilution. B. Only financial risk from debt. C. Business risk. D. No risk if debt is absent.

Explanation

Correct answer C: Business risk.

Operations can vary independently of financing.

FM-C06-P002 · 2 marks

Volume grows 8%, EBIT 24%, same base. DOL?

A. 24. B. .3333. C. 3. D. 8.

Explanation

Correct answer C: 3.

24/8.

FM-C06-P003 · 2 marks

EBIT grows 24%, EPS 36%, same base. DFL?

A. .6667. B. 4.5 combined measure. C. 1.5. D. 3.

Explanation

Correct answer C: 1.5.

36/24.

FM-C06-P004 · 2 marks

Sales 100 lakh, variable cost 60 lakh, fixed operating 25 lakh. Contribution?

A. 40 lakh. B. 60 lakh. C. 15 lakh EBIT. D. 75 lakh.

Explanation

Correct answer A: 40 lakh.

Sales minus variable cost.

FM-C06-P005 · 2 marks

Same 100/60/25 income figures. DOL?

A. .375 MOS. B. 4. C. 1.6667 fixed/EBIT. D. 2.6667.

Explanation

Correct answer D: 2.6667.

Contribution 40/EBIT 15.

FM-C06-P006 · 2 marks

Fixed operating 25 lakh, contribution margin 40%. Break-even sales?

A. 62.5 lakh. B. 100 lakh. C. 25 lakh. D. 10 lakh.

Explanation

Correct answer A: 62.5 lakh.

25/.4.

FM-C06-P007 · 2 marks

Price 100, variable 60 rupees, fixed 3 lakh. Continuous operating BEP units?

A. 7,500. B. 5,000. C. 12,000. D. 3,000.

Explanation

Correct answer A: 7,500.

300000/(100-60).

FM-C06-P008 · 2 marks

Sales 80 lakh, break-even 60 lakh. MOS as a fraction and DOL?

A. .25 and 4. B. 25 and .04. C. .75 and 1.3333. D. .20 and 5.

Explanation

Correct answer A: .25 and 4.

(80-60)/80=.25, inverse 4.

FM-C06-P009 · 2 marks

Positive contribution, no operating fixed cost. DOL?

A. Undefined at all positive volumes. B. 0. C. Always negative. D. 1, meaning no fixed-cost magnification.

Explanation

Correct answer D: 1, meaning no fixed-cost magnification.

EBIT=contribution; DOL 1, business risk not absent.

FM-C06-P010 · 2 marks

At operating break-even with positive fixed cost, base DOL is what?

A. A finite percentage forecast always. B. 1. C. 0 as measured ratio. D. Undefined because base EBIT is zero.

Explanation

Correct answer D: Undefined because base EBIT is zero.

Contribution/zero; limits unbounded, base ratio undefined.

FM-C06-P011 · 2 marks

Contribution 3.2 lakh, fixed 4 lakh. DOL?

A. -4. B. -.25. C. 4. D. .8.

Explanation

Correct answer A: -4.

EBIT-.8; 3.2/-.8.

FM-C06-P012 · 2 marks

Unit contribution 40 rupees, fixed 3 lakh, volume 15000. DOL?

A. 1.6 at 20000. B. .5. C. 4 at another volume. D. 2.

Explanation

Correct answer D: 2.

C 6 EBIT 3 lakh.

FM-C06-P013 · 2 marks

Base Q 10000, price 100, variable 60, fixed 3 lakh. Only price rises 10%. EBIT percent change?

A. 4%. B. 100%, not base volume-DOL times 10%. C. 40% from wrong volume shortcut. D. 10%.

Explanation

Correct answer B: 100%, not base volume-DOL times 10%.

Base EBIT 1 lakh, new 2 lakh.

FM-C06-P014 · 2 marks

Sales 100, variable 60%, fixed 25 lakh; at sales 120 fixed 35. New EBIT?

A. 13 lakh. B. 15 lakh. C. 23 lakh holding fixed cost wrongly. D. 48 lakh contribution.

Explanation

Correct answer A: 13 lakh.

120 x.4-35=13.

FM-C06-P015 · 2 marks

EBIT 18, interest 6 lakh, no preference. DFL?

A. 3 interest coverage. B. .6667. C. 2.6667 operating ratio. D. 1.5.

Explanation

Correct answer D: 1.5.

18/(18-6).

FM-C06-P016 · 2 marks

EBIT 18, interest 6, tax 25%, shares 4 lakh/no preference. EPS?

A. Rs 3.00 pretax. B. Rs 2.25. C. Rs 9 total PAT as EPS. D. Rs 4.50 ignoring interest.

Explanation

Correct answer B: Rs 2.25.

12 x.75/4.

FM-C06-P017 · 2 marks

EBIT 20, interest 4, preference 3 lakh, tax 25%. Ordinary-EPS DFL?

A. 1.25 ignoring preference. B. 5. C. 1.6667. D. 1.5385 not tax-adjusting dividend.

Explanation

Correct answer C: 1.6667.

20/(20-4-3/.75).

FM-C06-P018 · 2 marks

Interest 4, preference 1.5 lakh, tax 25%. Financial BEP EBIT?

A. 4 lakh ignoring preference. B. 1.5 lakh. C. 6 lakh. D. 5.5 lakh no tax adjustment.

Explanation

Correct answer C: 6 lakh.

4+1.5/.75.

FM-C06-P019 · 2 marks

No interest or preference, constant positive tax regime/shares. DFL?

A. Always above 2. B. 1. C. Undefined whenever tax exists. D. 0.

Explanation

Correct answer B: 1.

EPS proportional to EBIT under assumptions.

FM-C06-P020 · 2 marks

Positive EBIT 3, interest 4, full immediate 25% loss refund expressly supplied. DFL?

A. 3. B. -3. C. -.3333. D. .75.

Explanation

Correct answer B: -3.

3/(3-4); negative base ordinary earnings needs sign care.

FM-C06-P021 · 2 marks

EBIT-2, interest 3 lakh, ignore tax. Algebraic DFL?

A. 2.5. B. .4, so broad range claim needs a scope boundary. C. -2. D. Always outside 0 to 1 regardless of EBIT.

Explanation

Correct answer B: .4, so broad range claim needs a scope boundary.

-2/(-2-3)=.4; source page 18 broad wording is not universal over this extension.

FM-C06-P022 · 2 marks

EBIT 2, interest 4, shares 2 lakh, no immediate loss refund. EPS?

A. Rs 0.00. B. Rs-1.00. C. Rs 1.00. D. Rs-.75 using false automatic shield.

Explanation

Correct answer B: Rs-1.00.

EBT-2 tax 0, divide 2.

FM-C06-P023 · 2 marks

Sales 120, variable 60%, fixed 30, interest 6 lakh/no preference. DCL?

A. 2.6667 DOL only. B. 4.1667 from another case. C. 1.5 DFL only. D. 4.

Explanation

Correct answer D: 4.

Contribution 48/EBT 12.

FM-C06-P024 · 2 marks

DCL 4 at compatible positive linear base; volume falls 10%. Ordinary EPS change?

A. Falls 10%. B. Rises 40%. C. Falls 40%, if same regime persists. D. Guaranteed insolvency.

Explanation

Correct answer C: Falls 40%, if same regime persists.

DCL times volume percent; not a payment conclusion.

FM-C06-P025 · 2 marks

DFL 2, interest 4 lakh/no preference. EBIT?

A. 8 lakh. B. 12 lakh. C. 2 lakh. D. 4 lakh.

Explanation

Correct answer A: 8 lakh.

2(E-4)=E.

FM-C06-P026 · 2 marks

DOL 3, EBIT 8 lakh, contribution margin 40%. Sales?

A. 20 lakh. B. 60 lakh. C. 16 lakh fixed cost. D. 24 lakh contribution.

Explanation

Correct answer B: 60 lakh.

3 x 8/.4.

FM-C06-P027 · 2 marks

EBIT 10, interest 3 lakh/no other charge, asserted exact DFL 2. Best treatment?

A. Accept both ratios automatically. B. Ignore interest entirely. C. Create an actual 2 lakh liability from the gap. D. Flag incompatible givens; do not invent actual other interest.

Explanation

Correct answer D: Flag incompatible givens; do not invent actual other interest.

Calculated DFL 10/7; DFL 2 implies interest 5, gap 2 is unexplained.

FM-C06-P028 · 2 marks

EBIT 15, total book capital 100, debt 40 at 10%, equity 60 lakh, tax 25%. Pre-tax ROI and ROE?

A. 25% and 13.75%. B. 13.75% and 15% swapped. C. 15% and 13.75%. D. 11.25% and 15%.

Explanation

Correct answer C: 15% and 13.75%.

ROI 15/100; PAT 8.25/equity 60.

FM-C06-P029 · 2 marks

A DOL 2/DFL 3, B DOL 3/DFL 2. Which is supported?

A. Both DCL 5. B. Both DCL 6, not identical risk distributions or a universal best choice. C. B must always be best. D. A must always be best.

Explanation

Correct answer B: Both DCL 6, not identical risk distributions or a universal best choice.

Equal products can conceal different operating/financing exposures.

FM-C06-P030 · 2 marks

PAT 7.5, depreciation 5, principal 8, additional investment 7 lakh; no other adjustments. Cash gap?

A. 2.5 lakh shortfall. B. 12.5 lakh final surplus ignoring outflows. C. 2.5 lakh surplus. D. 7.5 lakh surplus.

Explanation

Correct answer A: 2.5 lakh shortfall.

7.5+5-8-7=-2.5.