There are two compaines B and D. Total contribution of capital is ₹40 lakh each. The ratio of equity to total capital in company B is ₹10 lakh and debt is ₹30 lakh while in company D, the total equity capital is ₹ 40 lakh, sourced through equity. EBIT is ₹ 8 lakh , the interest rate on debt is @10% and the tax rate is 30%.
Identify, which concept is related to the above case.

Explanation

Dharavi Ltd enjoys a favourable financial leverage because of trading on equity. It refers to increase in the return of equity shareholders with the use of fixed charge debt instrument in the capital structure of the company. It can be explained by the following
illustration

Thus, we observe that with the use of debt, earning per share increases, provided `"RoI" gt "CoD"`,i.e. cost of debt or rate of interest is less than rate of return of the company.