Compute the degree of financial leverage for each of the companies Tattoos Ltd. and Gherkins Ltd. based on the following information: Tattoos Ltd. Gherkins Ltd. Earnings Before Interest and Tax ₹50,000 ₹1,25,000 Debentur

Computation of Degree of Financial Leverage (DFL) The formula for Degree of Financial Leverage (DFL) is: DFL = EBIT / [EBIT - Interest - (Preference Dividend / (1 - Tax Rate))] For Tattoos Ltd.: EBIT = ₹50,000 Interest on Debentures = 8% of ₹2,50,000 = ₹20,000 Preference Dividend = 10% of ₹1,00,000 = ₹10,000 Tax Rate = 35% (0.35) Preference Dividend (Grossed up) = Preference Dividend / (1 - Tax Rate) Preference Dividend (Grossed up) = ₹10,000 / (1 - 0.35) = ₹10,000 / 0.65 ≈ ₹15,384.62 EBT equivalent for DFL calculation = EBIT - Interest - Preference Dividend (Grossed up) EBT equivalent = ₹50,000 - ₹20,000 - ₹15,384.62 = ₹14,615.38 DFL Tattoos = EBIT / EBT equivalent DFL Tattoos = ₹50,000 / ₹14,615.38 ≈ 3.42 For Gherkins Ltd.: EBIT = ₹1,25,000 Interest on Debentures = 8% of ₹3,00,000 = ₹24,000 Preference Dividend = 10% of ₹1,50,000 = ₹15,000 Tax Rate = 35% (0.35) Preference Dividend (Grossed up) = Preference Dividend / (1 - Tax Rate) Preference Dividend (Grossed up) = ₹15,000 / (1 - 0.35) = ₹15,000 / 0.65 ≈ ₹23,076.92 EBT equivalent for DFL calculation = EBIT - Interest - Preference Dividend (Grossed up) EBT equivalent = ₹1,25,000 - ₹24,000 - ₹23,076.92 = ₹77,923.08 DFL Gherkins = EBIT / EBT equivalent DFL Gherkins = ₹1,25,000 / ₹77,923.08 ≈ 1.60 Summary: Degree of Financial Leverage for Tattoos Ltd. ≈ 3.42 Degree of Financial Leverage for Gherkins Ltd. ≈ 1.60