CAIIB · Advanced Business & Financial Management · Module B — Advanced Concepts of Financial Management
CAIIB ABFM Unit 8 — Financial and Operating Leverages: Free MCQs with Explanations
By Swarnakshi Jha (ex-banker) · Updated 29 October 2026 · Paper III of the December 2026 cycle (Sunday 13 December 2026)
This is the free practice page for CAIIB ABFM Unit 8 — Financial and Operating Leverages (Module B — Advanced Concepts of Financial Management). The CAIIB Mock Centre holds 134 questions on this unit alone, every one with a why-right / why-wrong explanation; below are the facts examiners keep returning to, five practice questions with explanations, and the traps that cost marks.
ABFM · Module B134 MCQs in the Mock Centre5 free belowPaper on 13 December
Key facts examiners test from this unit
Leverage and financial leverage — financial leverage uses borrowed money to lift EPS, which works only while assets earn more than the debt costs.
Degree of financial leverage — DFL = EBIT ÷ EBT tells how many per cent EPS moves for each 1% move in EBIT.
Behaviour of financial leverage — DFL is 1 without debt, above 1 with it, undefined at financial break-even and negative below it; leverage cuts both ways.
Changed since the textbook
RBI sets minimum leverage ratios for banks (28 June 2019). RBI's revised leverage ratio guidelines (28 June 2019) set a minimum leverage ratio, Tier 1 capital divided by total exposure, of 4% for domestic systemically important banks (D-SIBs) and 3.5% for other banks, from the quarter beginning 1 October 2019, to be met at all times. Banks had earlier been monitored against an indicative 4.5%. Source: Business Standard (PTI) report on RBI's leverage ratio guidelines
Tax limit on interest paid to foreign group lenders (thin capitalisation) (1 April 2017). Section 94B of the Income-tax Act, 1961, inserted by the Finance Act, 2017 (from assessment year 2018-19), caps the deduction for interest of more than ₹1 crore paid by an Indian company to non-resident associated enterprises: interest above 30% of EBITDA, or the interest paid to such enterprises if lower, is disallowed, and may be carried forward for up to eight years. Banks and insurance companies are excluded. The rule continues as section 177 of the Income-tax Act, 2025. Source: TaxGuru on Section 94B
5 free practice questions — tap an option
Five practice questions from this unit. Answers lock on the first tap, exactly as in the exam, and an explanation opens underneath. The Mock Centre has all 134 questions on this unit, from easy to tough, with caselets and key-in numericals, why every other option is wrong and the exam tip — and tracks your score and revision dates.
Question 1 of 5
How is the interest coverage ratio calculated, and what does a higher value mean?
Why (d): The textbook gives interest coverage as EBIT ÷ interest expense; the more times profit covers interest, the safer the firm and the lower its leverage. (a) is wrong: Coverage uses EBIT, not debt. (b) is wrong: The ratio is inverted. (c) is wrong: Higher coverage means less leverage.
Question 2 of 5
In what order is an income statement built down to EBT for computing DFL?
Why (d): Sales less variable cost gives contribution; less fixed operating cost gives EBIT; less interest gives EBT; DFL = EBIT ÷ EBT. (a) is wrong: EBIT comes after contribution. (b) is wrong: EBT comes after EBIT. (c) is wrong: Contribution is derived from sales.
Question 3 of 5
Netravati Foods' EBIT is exactly equal to its interest. What is its DFL?
Why (c): The textbook's third situation: at break-even, EBT is nil, so DFL = EBIT ÷ 0 is undefined. (a) is wrong: DFL is 1 only without interest. (b) is wrong: DFL is EBIT ÷ EBT, not zero. (d) is wrong: EBT is nil, not negative.
Question 4 of 5
Which expression is equal to the degree of combined leverage?
Why (d): DTL = DFL × DOL = (EBIT ÷ EBT) × (contribution ÷ EBIT) = contribution ÷ EBT. (a) is wrong: It inverts the ratio. (b) is wrong: That is DOL. (c) is wrong: That is DFL.
Question 5 of 5
Firms P and Q have the same sales, the same debt and the same interest cost. P's costs are mostly fixed (an automated plant), while Q's are mostly variable. Which firm has the higher business risk, and which measure shows it?
Why (c): Business risk is the variability of operating profit, and high fixed operating costs magnify it: P's degree of operating leverage (contribution ÷ EBIT) is higher, so a fall in sales cuts its EBIT more. Equal debt and interest bear on financial risk, which financial leverage measures; they do not remove the difference in business risk. (a) is wrong: Q's mostly variable costs give it the lower DOL. (b) is wrong: Financial leverage measures financial risk, which is equal here. (d) is wrong: Equal debt leaves business risk free to differ.
0 of 5 answered.
Traps in this unit
Borrowing lifts EPS only if assets earn more than interest.
Higher interest coverage means less leverage.
DFL is EBIT ÷ EBT, not EBT ÷ EBIT.
Practise all 134 questions on Unit 8. The free CAIIB demo opens Units 1–2 of every paper with full explanations; the ABFM Online Mock Centre unlocks all 4,000+ ABFM questions, the full-length papers with caselets and key-ins, module mocks and Smart Revision for 18 months (₹1,499).
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