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Assignment 4 (Leverage)

This document contains 10 problems related to calculating various measures of leverage from financial information provided about different companies. The problems provide sales, costs, capital structure, tax rates and other details and ask the reader to calculate operating leverage, financial leverage, combined leverage, earnings before interest and taxes (EBIT), and earnings per share (EPS) based on the information given.

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85 views2 pages

Assignment 4 (Leverage)

This document contains 10 problems related to calculating various measures of leverage from financial information provided about different companies. The problems provide sales, costs, capital structure, tax rates and other details and ask the reader to calculate operating leverage, financial leverage, combined leverage, earnings before interest and taxes (EBIT), and earnings per share (EPS) based on the information given.

Uploaded by

dangerous saif
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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B.S.

ABDUR RAHMAN CRESCENT INSTITUTE OF SCIENCE AND TECHNOLOGY


Department of Management Studies
MSD 6203 Financial Management
Assignment – 4
Date of submission – 13.05.2020

1. A company has sold 300 units at a selling price of Rs. 50 and variable cost of Rs. 30. The fixed
cost is Rs. 5000. Later the company has increased the sales to 350 units and decreased the sales
to Rs. 250 units. Keeping 300 units as base, find
(i) degree of operating leverage for 300 units and 350 units
(ii) degree of operating leverage for 300 units and 250 units
(iii) degree of operating leverage for 300 units and 350 units, when there is no fixed cost.

2. A company has Rs. 100000, 10% debentures and 5000 equity shares outstanding. It is in 50% tax
bracket. Assuming three levels of EBIT Rs. 50000, Rs.30000 and Rs. 70000. Keeping Rs. 50000
as base, find
(i) degree of financial leverage for EBIT level of Rs.50000 and Rs. 30000
(ii) degree of financial leverage for EBIT level of Rs. 50000 and Rs. 70000
(iii) degree of financial leverage for EBIT level of Rs. 50000 and Rs. 30000, when there is no
debenture in the capital structure.

3. Calculate operating and financial leverages from the following particulars:


Units sold 5000
Variable cost per unit Rs 20
10% public debt Rs 1,00,000
Selling price per unit Rs 30
EBIT Rs 30000

4. The capital structure of Balaji Ltd. Consist of equity share capital of Rs 500000 and 9% debentures
of Rs250000. The fixed cost is Rs 50000. You are required to ascertain operating leverage and
financial leverages when EBIT is Rs 100000

5. From the following particulars, calculate operating leverage, financial leverage and combined
leverage:
Sales Rs1,20,000
Interest Rs12,000
Variable cost Rs 72,000
Fixed cost Rs 18,000

6. Compute the operating, financial and combined leverage from the given data:
Sales Rs 50,000 unit and at Rs 12 per unit
Variable cost at Rs 8 per unit
Fixed cost Rs 90,000 (including 10% interest on Rs 2,50,000)
7. Taylor Ltd has an average selling price of Rs 10 per unit. Its variable unit cost is Rs 7 and fixed
costs amounts to Rs 3,40,000. It finances all its assets by equity funds. It pays 50% tax on its
income. Bhatia Ltd is identical to Taylor Ltd. Except in respect of the pattern of financing. The
latter finances its assets 50% by equity and 50% by debt. The interest on which amounts to
Rs.40,000. Determine the operating, financial and combined leverages at Rs 14,00,000 sales for
both the firms and interprets the results.

8. Ajay Ltd. and Vijay Ltd. have supplied you the following information:

Ajay Ltd Vijay Ltd


Sales (units) 30000 30000
Selling price per unit (Rs) 40 40
Variable cost per unit (Rs) 25 26
Fixed operating cost (Rs) 3,00,000 3,00,000
Fixed financing cost (Rs) 50,000 60,000

Which firm do you consider more risky and why?


9. The capital structure of Hindustan corporation Ltd, consists of equity share capital of Rs.
10,00,000 (shares of Rs 100 each) and Rs 10,00,000 of 10% debentures. Sales have increased
From 1,00,000 units to 1,20,000 units, the selling is Rs 10 per unit variable cost per unit, Rs 6 and
the fixed expenses amount to Rs 2,00,000. The income tax is assumed to be 50%.
You are required to calculate the following:
a) Operating leverage at 1,00,000 units and 1,20,000 units.
b) Financial leverage at 1,00,000 units and 1,20,000 units.

10. From the following information available for four companies, calculate-

a) EBIT b) EPS c) operating leverage d) financial leverage c) Combined leverage

Particulars P Q R S
Selling price/unit (Rs) 15 20 25 30
Variable cost/unit (Rs) 10 15 20 25
Quantity (nos.) 20,000 25,000 30,000 40,000
Fixed cost (Rs) 30,000 40,000 50,000 60,000
Interest (Rs) 15,000 25,000 35,000 40,000
Tax rate (%) 40 40 40 40
No. of equity shares 5,000 9,000 10,000 12,000

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