Leverages

CA AUnal Chandika
M.Com Banking & Finance

LEVERAGE
CLASSWORK SHEET
Q:1) A firm has sales of Rs. 40 lakhs, variable 30
cost of
lakhs, and equity capital of Rs. 45 lakhs. Calculate
Rs. 25lakhs, fixed cost of Rs. 6 lakhs, 10% debentures of
operating and financial leverage.
(CA-Inter, Nov. 2007, adapted)
Q:2) Annual sales ofa company is Rs. 60,00,000. Sales to variable cost ratio is 150% and fixed cost other than st
Rs.5,00,000 per annum. Company has 11% debentures of Rs. "
You are 30,00,000.
required to calculate the operating, financial and combined
leverage of the company
(CA-Inter, Nov. 2008, adapted)
a:3)The data relating to two companies are as given below:
Particulars CompanyA
Equity capital Company8
12% debentures Rs. 6,00,00o Rs. 3,50,000
Rs. 4,00,000 Rs. 6,50,000
Output (units) per annum 60,000 15,000
Selling price per unit
Fixed cost per annum
Rs. 30 Rs 250
Rs. 7,00,000 Rs. 14,00,000
Variabte cost per unit
You are
Rs. 10 Rs 75
required to calculate the operating leverage, financial leverage and combined leverage of two companies.
(CA-Inter, Nov. 2002, adapted)

Q:4) The following details relating to a company are given:

Sales per annum 1,00,000 units
Variable cost Rs. 90 per unit
Fixed cost including interest per annum Rs. 18,00,000
P/V Ratio 25%
10% Debentures Rs. 30,00,000
Equity share capital (Shares of Rs. 10 each) Rs. 40,00,000
Corporate tax rate 30%
Calculate: operating leverage, financial leverage, combined leverage & earnings per share.
(ICWA-Inter, June. 2014, adapted)
Q:5) ABS Relaxon Ltd provides a simplified Income Statement as given below:
Incomestatement of ABS Relaxon Ltd. for the year ended 31-03-2015
Particutars Rs. Rs.
Sales 10,50,000
Less: variable cost 7,67,000
Fixed cost 75,000 8,42,000
EBIT 2,08,000
Less: interest 1,10,000
98,000
EBT
Less:taxes@30% 29,400

Net Income 68,600

financial leverage and combined leverage. Interpret company's combined leverage.
Calculate operating leverage,
(ICWA-Inter, June. 2015, adapted)

Q: 6) The following particulars are furnishes to you relating

to a company:
Rs. in lakhs
Particulars
Sales 1,000
400
Variable cost
 L e v e r a g e s

CA K u m a lC h a n d i k a
M.Com Banking & Finance
300
i x e dc o s t

Contribution
600
Interest

Proftbefore tax 100

Y

oft
o ua r e r e q

uired to calculate operating

u l r e d

200
9 leverage and financial
leverage from the above.
Light&;
&
Sound Co. has sales of Rs.
a:7)M/s (ICWA-Inter, Dec. 2015, adapted) 2 , 0 0 , 0 0 0a n dd e b t

Rs. of 10% rate of interest.

5,00,000
12,00,000, variable cost Rs. 9,00
,00,000 and fixed cost is Rs.
of etails find out
e above deta
ings before interest and tax (EBIT leverage,
how r
operating financial
ncial leverage and combined leverage. If the Co. wan
W a n t st o d o u b l e

its e leverage and

(ICWA-Inter, Dec. 2015,a adapted)
rise in sales would be needed on a percentage basis

Q:8) The follow lowing summarises the

pharmaceutical firms. percentage changes in n
operating income, percentage changes in revenues for fou
Firm

PQR Ltd.
Changes in revenue Changes in operating income
27%
RST Ltd. 25% 25%
TUV Ltd. 23% 32%
WXY Ltd. 21% 36%
40%
Vou are required to calculate the
degree of operating
leverage for each of these firms.
0:9) Calculate the operating leverage, financial (CA-Inter, May 2015, Nov. 2004, adapted)
leverage and combined leverage for the following tirms:
Particulars N
Production (in unit) S D
Fixed cost (Rs.)
17,500 6,700 31,800
4,00,000 3,50,000 2,50,000
Interest on loan (Rs.)
1,25,000 75,000 Nil
Selling price per unit (Rs.) 85 130 37
Variable cost per unit (Rs.) 38.00 42.50 12.00
(CA-Inter, Nov. 2013, M.Com., Oct. 2011, adapted)
Q:10) The data relating to folloing companies and their details are as follows:
Particulars CompanyX CompanyY
Equity capital 3,00,000 3,50,000
12% debentures 2,00,000 6,50,000
Output (units) p.a. 30,000 15,000
Selling price per unit 30 250
Fixed cost p.a. 3,50,000 14,00,000
Variable cost per unit 10 75
You are required to calculate the operating leverage, financial leverage and combined leverage.
(M.Com., Oct. 2014, adapted)
Q: 11) Acompany had the following Balance Sheet as on 31" march, 2014:
Liabilities&Equity Rs. in crores |Assets Rs. in crores
Equity share capital (one crore Fixed assets (Net) 25
shares of Rs. 10 each) 10 Current Assets 15
Reserves and surplus 2
15% Debentures 20
Currentliabilities 8
40 40
The additional information given is as under:
Fixed cost per annum (excluding interest) Rs.8crore
Variable operating cost ratio 65%
Total asset turnover ratio 2.5
Iicóme tax räte 40%
 n a l Chandika

Aleulate the following & comment: M.Com Banking &Finat

L e v e r a g e s

earning
(CA-Inter, Apr. 2014, Nov. per share,
operating leverage, financial leverage, O m b i n e d l e v e r a g e .

a: 12) the 2006, tombine

following
Equity share capital information related to XL
2011, M.Com., Apr. 2010, adaptcd
of Rs. 10 each Company Ltd for the year ended 31-03-2013 are
available to
y o u :

11% Bonds of Rs. Rs. 28 lakhs

10 each
Sales Rs. 18.5 lakhs
Fixed cost
(excluding interest)
Financial leverage
Rs. 42 lakhs
Rs. 3.48 lakhs
Profit volume ratio 1.39
Income taX rate applicable 25.55%
You are
operating leverage, combined leverage and 35% snare.
Tequired to calculate the
a: 13) Ihe capital
earningsper
(CA-Inter, May. 2013, adapted)
structure of RST Ltd. is as
Particulars follows:
Equity shares of Rs. 10 Rs.
10% each
preference shares of Rs. 100 each 8,00,000
12% Debentures of Rs. 100 5,00,000
each 7,00,000
Additional information: 20,00,000
Profit after tax
(Tax rate 30%) are Rs.
Operating expenses (including 2,80,000.
Equity dividend paid is 15%. depreciation Rs. 96,800) are 1.5 times of EBIT.
Market price of
equity share is Rs. 23.
Ldicuiate
operating and financial leverage, cover for
earning ratio. preference & equity dividend, the earning yield ratio and price
NOte All operating expenses (excluding depreciation) are variable.
(CA-Inter, Nov. 2014, adaptea)
Q: 14) A firm has sales of
Rs. 75,00,000 variable cost of Rs.
45,00,000 at 9% and equity of Rs. 42,00,000 and fixed cost of Rs. 6,00,000. It has a debt of Rs.
55,00,000.
(0) What are the operating, financial and
combined leverages of the firm?
(CA-Inter, Nov. 2009, adapted)
Q 15) a firm earns a contribution of Rs. 4,80,000. Its operating leverage and financial
Find the firm's PAT if the effective tax leverage are respectively 4 & 5.
rate is 25%.
(ICWA-Inter, Dec. 2015, adapted)

Q:16) Consider the following information for Omega Ltd:

Rs. in lakhs
EBIT
15,750
EBT
7,000
Fixedoperating costs 1,575
Calculate percentage change in earnings per share, if sales increase 5%.
by
(CA-Inter, Nov. 2007, adapted)
Q: 17) the following details of A Ltd. for the year ended 31/03/2014 are furnished:
Operating leverage 3:1
Financial leverage 2:1
Interest charges p.a. Rs. 20 lakhs
Corporate tax rate 50%
Variable cost as percentage of sales 60%
Prepare the income statement of the company
(ICWA-Dec 1995, adapted)
Q:18) prepare theincome statement of the firm which gives the following details relating to its operations:
Operating leverage 4
 Leverages

CA Kunal Chandika

M.Com Banking & Finance

Financialleverage
A n n u a l i n t e r e s tp a i d

C o n t r i b u t i o n /s a l e s Rs. 10 lakhs

Tax rate
0.4
40%
the follow. (ICWA-Inter, Dec 2002, adapted)
Q: 19)
from
wing financial data of Company Aand Company B, prepare their income statenents.
P a r t i c u l a r s

Company B (R«.)
Variable c o s t Company A(Rs.)
60% of sales
Fixed cost 56,000
nterest expenses 20,000
Financial leverage 12,000 9,000
5:1
Operating leverage
4:1
Income tax rate
30% 30%
sales
10,05,000
(CA-Inter, Nov. 2009, adapted)
a: 20) Ton ne Tollowing, prepare income statement of Company A, Company B and Company C. Briefly comment o
each company's performance:
Company A B C
Financial leverage 3:1 4:1 2:1
Interest
Rs. 200 Rs. 300 Rs. 1,000
Operating leverage 4:1 5:1 3:1
Variable cost as a percentage to sales 662/3d % 75% 50%
Incometax rate 45% 45% 45%
(Mcom., Apr. 05, adapted)
a:21)the selected financial data A, B and C companies for the current year 31-03-2013 are as follows
Particulars A B C
Variable cost as a percentage to sales 70 75 50
Interest expenses (Rs.) 2000 1300 3,000
Degree of Operating leverage 5
Degree of Financial leverage 4 2
Incometax rate 35% 35% 35%
(a) Prepare income statements for A, B and C companies.
(Mcom., Oct. 2013, adapted)
a: 22) From the following details of XLtd., prepare the income statement for the year ende d31-12-2014:
Financial leverage 2
Interest Rs. 2,000
Operating leverage 3
Variable cost as a percentage to sales 75%
Incometax rate 30%
(CA-Inter, Nov. 2015, adapted)
Q.23) From the Following information given below calculate all 3 leverages
a. Assets Turnover Ratio-5 times
b. Total Assets-Rs 15,00,000
C.P/V Ratio-20%
d. Fixed Costs Rs 10,00,000
e. Tax Rate 20% and debenture interest Rs 50,000