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CH- 3 LEVERAGE
Problems :

1. From the following information compute the degree of Operating Leverage:-

Sale 50,000 units @ Rs 10 per units = Rs 5,00,000.
Variable cost per unit @ Rs 7
Fixed cost = Rs 1,00,000 [Ans :- DOL = 3]
2. From the following information compute the degree of Financial Leverage
Rs
Sales 4,00,000

Variable cost 2,00,000

Fixed cost 1,20,000

Interest charges 7,500 [Ans :- DFL = 1.103]

3. Calculate degree of Operating Leverage, degree of Financial Leverage and Combined Leverage from the following
data:
Sales 2,00,000 units @ Rs 20 per unit = 40,00,000
Variable cost per unit @ Rs 7
Fixed cost Rs 20,00,000
Interest charges Rs 1,00,000 [Ans :- DOL = 4.33; DFL = 1.2; DCL = 5.196]
4. Calculate operating, financial and combined leverages under situations when fixed costs are a) Rs 5,000, and b) Rs
10,000 under financial plans 1 and 2 respectively from the following information pertaining to the operation and
capital structure of a textile company;
Total Assets 30,000
Total assets turnover ratio 2
Variable cost as a percentage of sales 60
Financial plan
1 2
Rs Rs

Equity 30,000 10,000

10% Debentures 10,000 30,000

[Ans :- a) Operating Leverage (DOL) = 1.26, 1.26; Financial Leverage (DFL) : 1.055; 1.187, campsite

Leverage (DCL) : 1.329; : 1.496. b) Operating Leverage (DOL) = 1.714, 1.714; Financial Leverage

(DFL) : 1.077, 1.273; composite Leverage (DCL) = 1.846, 2.181]

5. Calculate i) Operating Leverage, and Financial Leverage from the following figures:
(Rs in lakhs)
Original After an increase of 10% in sales
Sales (1,500 lakhs units at
Rs 1 selling price) 1,500 1,650
Variable cost (Rs 0.60 per unit) 900 990
Fixed costs 450 450
Earnings before interest & tax 150 210
Less: Interest 50 50
100 160
Tax at 55% 55 88

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[Ans :- Original Level : DOL = 4, DFL = 1.5; after an increase of 10% in Sales: DOL = 3.14; DFL = 1.31.]
6. An analytical statement of AB Company is show: It is based on an output (Sales) level of 80,000 units.
Rs
Sales 9,60,000

Variable cost 5,60,000

Revenue before fixed costs 4,00,000

Fixed costs 2,40,000

1,60,000

Interest 60,000

Earning before tax 1,00,000

Tax 50,000

Net income 50,000

Calculate the degree of i) Operating Leverage, ii) Financial Leverage and iii) The Combined leverage

from the above data. [Ans :- DOL : 2.5; DFL : 1.6; DCL : 4].

7. Calculate the Operating the Leverage Financial and Combined Leverage from the following information:
Rs
Interest 5,000

Sales 50,000 (1,000 units)

Variable cost 25,000

Fixed costs 15,000

[Ans :- Operating Leverage = 2.5; Financial Leverage 2, Combined Leverage = 5.]

8. a) Calculate degree of Operating Leverage, degree of Financial Leverage and Combined Leverage from the
following data:
Sales 1,00,000 units @ Rs 2 per unit = Rs 2,00,000
Variable cost per unit @ Rs 0.70
Fixed costs Rs 1,00,000
Interest charges Rs 3,668.
b) What contribution of operating and Financial Leverages constitute:
i) Risky situation and ii) and ideal situation.
[Ans :- a) DOL = 4.33; DFL = 1.14; DCL = 4. b) i) High Operating Leverage along with high Financial Leverage will
constitute risky situation. ii) Ideal situation = Both should be law. iii) Normal situation = Both should be law.]

9. A firm has sales of Rs 10,00,000, variable cost of Rs 7,00,000 and fixed costs of Rs 2,00,000 and debt of Rs 5,00,000
at 10% rate of interest. What are the Operating, financial and combined leverages? If the firm wants to double up
its earnings before interest and tax (EBIT), how much of a rise in sales would be needed on a percentage basis?
[Ans :- Operating Profit (EBIT) Rs 1,00,000; Profit Before tax (PBT) = Rs 50,000; Operating Leverage = 3, financial
leverage = 2, combined leverage = 6, again at the sales level of Rs 13,33,333.33, operating profit (EBIT) will be
come Rs 2,00,000 is double the existing one.]

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10. X corporation has estimated that for a new product its break-even point is 2,000 units if the item is sold for Rs 14
per unit; the cost according department has currently identified variable cost of Rs 9 per unit. Calculate the degree
of operating leverage for sales value of 2,500 units and 3,000 units and their difference if any? [Ans :- Operating
Leverage: At the 2,500 units : 5 times, and at 3,000 units : 3 times. At the sales volume of 3,000 units the
operating profit is double then operating profit at the volume of 2,500 units, since operating leverage is 5
times at the sales volume of 2,500 units. Hence by increase of 20% in sales volume, the operating profit is
increased by 100% i.e. 5 times of 20% at the output level of 3,000 units the operating leverage is 3 items.]
11. Calculate the degree of operating leverage (DOL) degree of financial leverage (DFL) and the degree of combined
leverage (DCL) for the following firms and interpret the results:

Firm A B C
Output (units) 60,000 15,000 1,00,000
Fixed cost (Rs) 7,000 14,000 1,500
Variable cost per unit (Rs) 0.20 1.50 0.02
Interest on borrowed capital (Rs) 4,000 8,000 Nil
Selling price per unit (Rs) 0.60 5.00 0.10
[Ans :- DOL – A : 1.41, B : 1.36 C : 1.23
DEL :- A : 1.31, B : 1.26, C : 1.00
DCL :- A : 1.85, B : 1.72, C : 1.23]
12. A firm has sales of Rs 5,00,000, variable cost of Rs 3,50,000 and fixed cost of Rs 1,00,000 and debt of Rs 2,50,000
at 10% rate of interest. What is combined leverage? If the firm wants to double its EBIT, how much of a rise in sales
would be needed on a percentage basis? [Ans :- Operating profit (EBIT) = Rs 50,000; profit before tax (EBT) = Rs
25,000; operating leverage = 3; financial leverage = 2; combined leverage = 6; again at the sales levels level of Rs
6.66.666.67; operating profit will be Rs 1,00,000 which is double the existing one % of rises in sales = 33⅓%].
[2006]
13. From the following information compute sales : DOL – 2; DFL – 3, interest Rs 3,00,000 and contribution is 40%
of sales. [Ans :- Sales = Rs 22,50,000] [2007]
14. The following information have been taken from the income statement of X Ltd:
Rs
Fixed operating expenses 1,200

Fixed financial charges 600

Earning before tax 400

Calculate percentage of change in EPS, if sales increase by 10 percent. [Ans :- Percentage change in

EPS 55%] [2010]

15. A multi-product company has the following cost and output data for the year 2010-11.
Product
X Y Z Total

Sales mix 40% 35% 25%

Unit selling price (Rs) 20 25 30

Variable cost per unit (Rs) 10 15 18

Fixed cost (Rs) 1,50,000

Sales (Rs) 5,00,000

Find out break-even point of sales. [Ans :- P/V ratio 44% BEP Rs 3,40,909.] [2010]

16. Which of the following financial plans would you recommend and why?

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Particulars Equity Plan Equity preference share plan Equity Debt Plan

Earning per share Rs 9.50 Rs 8 Rs 11.25

Price-earning ratio 20 17 16
[Ans: Equity plan would be recommended due to hire MPS.] [2011]
17. Given the following information –

Sales (10,000 units) Rs.10,00,000

Variable Cost Per unit Rs.60

Interest Rs. 1,00,000

EBT Rs.2,00,000

DCL 2.5

Calculate operating leverage and financial leverage . [2012]

Essay type

1. Calculate operating leverage and financial leverage under situations 1 and 2 and financial plans A and B respectively
from the following relating to the operating and capital structure of a company. What are the combinations of
operating and financial leverage which given highest and the least value?
Installed capacity 2,000 units.
Actual production & sales 50% of installed capacity
Selling prince per unit Rs 20
Variable cost per unit Rs 10
Fixed costs:
Situation 1 Rs 4,000
Situation 2 Rs 5,000
Capital structure:
Financial Plan
A B
Equity 5,000 15,000
Debt (cost of debt = 10%) 15,000 5,000
20,000 20,000
[Ans :- Financial Plan A Financial B

Situation 1 Situation 2 situation 1 situation 2

DOL 1.67 2 1.67 2

DFL 1.33 1.43 1.09 1.11

DCL 2.22 2.86 1.82 2.22

2. From the following information of Trends Ltd. Calculate the degree of operating leverage financial leverage and
combined leverage for each situations A and B under financial plans I, II and III. Also indicated which of the above
plans is most risky and which one is least-risky:
Production and sales 1,000 units
Selling price per unit Rs 20
Variable cost per unit Rs 15
Fixed cost (operating)
Situation A Rs 3,000
Situation B Rs 4,000

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Capital structure:
Plan
I II III
Rs Rs Rs
Equity 7,000 5,000 3,000
10% debt 3,000 5,000 7,000
10,000 10,000 10,000
[Ans :- DOL: Situation A = 2.50; Situation b = 5.00

DFL Financial Plan

I II III

Situation A 1.18 1.33 1.54

Situation B 1.43 2.00 3.33

DCL Highest value = Situation B × Financial Plan III

= 3.33 × 5 = 16.55

Least value = situation A × Financial Plant I

= 2.50 × 1.18 = 2.95] [2006]

3. Calculate the degree of operating leverage, degree of financial leverage and the degree of combined leverage for the
following firms and interpret the result:-
B Q R
Output (Units) 3,00,000 75,000 5,00,000

Fixed cost (Rs) 3,50,000 7,00,000 75,000

Unite variable cost (Rs) 1.00 7.50 0.10

Int. expenses (Rs) 25,000 40,000 Nil

Unit selling price (Rs) 3.00 25.00 0.50

[Ans :- B Q R

DOL 2.40 2.14 1.60

DFL 1.11 1.07 1.00

DCL 2.67 2.29 1.60

4. Calculate operating leverage and financial leverage under situations A, B and C and financial plans, I, II and III
respectively from the following information relating to the operation and structure of XYZ Co. also fined out the
combinations of operating and financial leverage which give the highest value and the least value. How are these
calculations useful to financial manager in a company.
Installed capacity 1,200 units
Actual production & sales 800 units
Selling price per unit Rs 15
Variable cost per unit Rs 10
Fixed cost: Situation A Rs 1,000
Situation B Rs 2,000

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Situation C Rs 3,000
Capital structure:
Financial Plan
I II III

Equity 5,000 7,500 2,500

Debt 5,000 2,500 7,500
Cost of debt 12%
[Ans :- DOL situation A : 1.33, situation B 2.00; situation C 4.00

DFL Financial Plan

I II III

Situation A 1.25 1.11 1.43

Situation B 1.43 1.18 1.82

Situation C 2.5 1.43 10.00

DCL Highest value = Situation operation Leverage is low and financial leverage is high EPS will be maximum .

5. The following is the balance sheet of a company.

Liabilities Rs Assets Rs
Equity capital (Rs 10 per share) 60,000 Net fixed assets 1,50,000
10% long-term debt 80,000 Current assets 50,000
Retained earning 20,000
Current liabilities 40,000
2,00,000 2,00,000
The company’s total assets turnover ratio is 3.0 its fixed operating costs are Rs 1,00,000 and its variable operating cost
ratio is 40%. The income tax rate is 50%.

a) Calculate for the company all the three types of leverages.

b) Determine the likely level of EBIT if EPS is i) Rs 1, b) Rs 3, c) Zero
[Ans :- a) DOL = 1.38 DFL = 1.03; DCL = 1.43, b) i) EBIT Rs 20,000; ii) EBIT Rs 44,000; ii) EBIT Rs 8,000]

6. ABC Ltd. Has an EBIT of Rs 1,60,000. Its capital structure consists of the following securities:
10% debentures 5,00,000
12% preference shares 1,00,000
Equity shares of Rs 100 each 4,00,000
The company is in the 55% tax bracket. You are required to determine:
a) The company’s EPS
b) The percentage change in EPS associated with 30% increase and 30% decrease in EBIT.
c) The degree of financial leverage.
[Ans :- a) EPS Rs 9,375; b) (After 30increase in EBIT) EPS Rs 14.775 percentage increase in EPS 57.6%, b) (After 30%
decrease in EBIT) EPS = Rs 3.975 percentage decrease in EPS = 57.6%, c) DFL = 1.92]

7. The capital structure of the Progressive Corporation consists of an ordinary share capital of Rs 10,00,000 (shares of
Rs 100 par value) and Rs 10,00,000 of 10% debentures. Sales increased by 20% from 1,00,000 units to 1,20,000
units, the selling price is Rs 10 per unit, variable cost amount to Rs 6 per unit and fixed expenses amount to Rs
2,00,000 the income tax rate is assumed to be 50%.
a) You are required to calculated the following:
1) The percentage increase in earnings per share.
2) The degree of financial leverage at 1,00,000 units and 1,20,000 units
3) The degree of operation leverage at 1,00,000 units and 1,20,000 units.
b) Comment on the behavior of operation and financial leverages in relation to increase of production from
1,00,000 units to 1,20,000 units.

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[Ans :- a) i) Percentage increase in earning per share 80%.

ii) DFL 2.0 and 1.56 respectively.

iii) DOL 2.0 and 1.71 respectively. B) in relation to increase in production & Sales of 1,00,000 units to 1,20,000 units
(20% increase). EPS has gone from Rs 5 to Rs 9 i.e. increased by 80%. But both the financial leverage and operating
leverage have decreased consequent upon the increase in sales. Due to the reduction, both the i.e. business are
reduce]

8. Relevant information about three companies are given below:

BIL PIL MIL
Annual production capacity (units) 1,00,000 1,50,000 2,50,000

Capacity utilization and sales 75 % 75% 75%

Unit selling price (Rs) 40 50 50

Unit variable cost (Rs) 15 15 20

Fixed cost p.a. (Rs) 2,00,000 3,00,000 5,00,000

Equity capital (Rs) 5,00,000 7,00,000 10,00,000

(1,000 share for each company)

10% preference capital (Rs) --- 50,000 1,00,000

15% Debenture (Rs) 1,00,000 2,00,000 3,00,000

Calculated operation leverage, financial leverage, combined leverage and EPS of these three companies and comment.

[Ans :- BIL PIL MIL

EPS Rs 830 Rs 1798.75 Rs 2,530

DOL 1.12 1.08 1.10

DFL 1.009 1.008 1.009

DCL 1.13008 1.08864 1.1099

[2008]

9. The capital structure of Moon Ltd. Is given below:

(Rs in lakhs)
Equity share capital (Rs 10 each per share) 10.00

Retained earning 6.00

10% preference share capital 4.00

20.00

The firm has planned to undertake an expansion scheme of Rs 10,00,000 which can be financed i) entirely by issue of
equity shares of Rs 10 each; or ii) by issue of 12% debentures of Rs 100 each at par.

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As a result of expansion, sales and operating fixed cost will by 60% and 75% respectively. The other relevant
information are give below:

Sales Rs 50,00,000

Variable cost 60%

Operating fixed cost Rs 5,00,000

Corporate tax 40%

Calculate leverages and EPS before and after expansion and give your opinion for taking appropriate decision with
respect to financing.

[Ans :- Particular Before expansion After expansion

Plan 1(Rs in lakh) Plan 2(Rs in lakh)

a) EPS 8.60 6.77 12.83

b) DOL 1.33 1.38 1.38
c) DFL 1.05 1.3 1.09
d) DCL 1.40 1.42 1.50
[2010]
10. The selected financial date for A, B & C companies for the year ended Dec 31, 2011 are as follows:
A B C
Variable expanses as a percentage of sales 66⅔ 75 50

Interest expenses Rs 200 Rs 300 Rs 1,000

Degree of operating leverage 5-1 6-1 2-1

Degree of financial leverage 3-1 4-1 2-1

Income tax rate 0.50 0.50 0.50

Prepare income statements for A, B & C Cos.

[Ans :- operating profit A: Rs 300 B: Rs 400 C: R 2,000

Fixed cost Rs 1,200 Rs 2,000 Rs 2,000

Contribution Rs 1,500 Rs 2,400 Rs 4,000

Pat (profit after tax) A Rs 50 B: Rs 50 C: Rs 500

Combined leverage 15-1 24-1 4-1]

11. Develop Performa income statement for the month of July. August and Sept. for a co. from the following information
a) Sales are projected at Rs 2,25,000; Rs 2,40,000 and Rs 2,15,000 for July. Aug and Sept. respectively;
b) Cost of goods is Rs 50,000 plus 30% of selling price per month;
c) Selling Exp. are 3% of sales;
d) Rent is Rs 7,500 p.m. administrative Exp. For July are expected to be Rs 60,000 but are expected to rise 1%.
P.m. over the previous month’s exp.
e) The Co. has Rs 3,00,000 of 8% Loan Int. payable monthly;
f) Corporate tax rate is 70%
[Ans :- July August Sept.

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Gross profit 1,07,500 1,18,000 1,00,500

EBIT 33,250 42,700 25,334

PBT 31,250 40,700 23,344

PAT 9,375 12,210 7,013]

12. Malancha Plast Ltd. Provides you the following information:

Capital Gearing Ratio: 3
Fixed cost: 1/3rd of total operating cost
Dividend yield : 6%
Operating ratio 75%
Ratio of 18% preference shares to 15% debenture : 12.5%
Dividend payment ratio 30%
Accumulated reserves: Rs 4,00,000
Capital employed: Rs 24,00,000
Market price of an equity share of Rs 10: Rs 135
Tax rate: 40%
Prepare an income statement and calculate the degree of operating leverage financial leverage and combined
leverage.
[Ans :- DOL = 2, DFL = 1.25, DCL = 2.5] [2011]
13. Consider the following information for S ltd.

Rs. In lakhs
EBIT 1,120
EBT 320
Fixed Cost 700
Calculate the percentage of changes in EPS of sales increase by 5%.
[Ans: Percentage change in EPS 28.44% (Approx).] [2012]
14.Anurup Ltd. has equity share capital of Rs. 5,00,000 divided into shares of Rs. 100 each. It wishes to raise Rs.
3,00,000 for expansion-cum-modernisation scheme. The company plans the following financing alternatives:

I. By issuing Equity Shares of Rs. 100 each

II. Rs. 1,00,000 by issuing Equity Shares of Rs.100 each and Rs. 2,00,000 througt issue of 10% Debenture.
III. By raising loan at 10% per annum.
IV. Rs. 1,00,000 by Equity shares of Rs. 100 each and Rs. 2,00,000 by issuing 8% Preference shares of Rs 100
each
You are required to suggest the best alternative giving your comment assuming that the estimated earnings
before interest and taxes (EBIT) after expansion is Rs. 1,50,000 and corporate rate of tax is 35%

[Ans: Financial plan C should be selected as it yield highest return to the Equity Shareholders.] [2013]

15. A company has the choice of issuing 10% debentures o 100 equity shares to raise Rs. 20 lakh to meet its long-term
investment requirements. Its current capital structure consists of Rs. 20,000 ordinary shares of 100 each, 8%
debentures o Rs 10,00,000 and 12% preference shares of Rs 10,00,000 . Determine the level of EBIT at which EPS
would be the same, whether the new funds are acquired by issuing ordinary shares of by issuing 10% debentures. Tax
rate is assumed to be 50% (Ignore dividend distribution tax.)

Also, construct EBIT-EPS chart assuming various levels of EBIT.

[Ans : Rs. 7,20,000. At the EBIT level of Rs 7,20,000 the firm is indifferent inrespect of financing the new project At this
level of EBIT, EPS is Rs.5.00] [2014]

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16. Operating leverage –Basics

A film sells its only product at Rs. 10 per unit. Its variable cost ratio is 70% while fixed costs are Rs. 1,000. Present
Sales are 1000 units. Required –

1. Find out –a) DOL, b) EBIT if sales increases by 40%, c) EBIT if sales falls by 25%

2. BY what % should sales fall before the firm starts including losses ?

17. Operating leverage – Effect of fixed Costs

The data of two Firms Rama and Krishna having the same PV ratio, is given below. Make relevant computations
and comment on their operating risks.

Particulars Rama Krishna

Sales Rs. 2,00,000 Rs. 2,00,000

Less: Variable Cost Rs. 1,20,000 Rs. 1,20,000

Contribution Rs. 80,0000 Rs. 80,0000

Less : Fixed Costs Rs. 30,000 Rs. 50,000

Profit Rs. 50,000 Rs. 30,000

18. Operating leverage – Effect of variable and fixed costs

The data of two films Karna and Arjuna, having the same profits, is given below. Make relevant computations and
comment on their operating risks.

Particulars Karna Arjuna

Sales Rs. 2,00,000 Rs. 2,00,000

Less : Variable Cost Rs. 1,20,000 Rs. 1,00,000

Contribution Rs. 80,0000 Rs. 1,00,0000

Less : Fixed Costs Rs. 30,000 Rs. 50,000

Profit Rs. 50,000 Rs. 50,000

19. Computation of Leverages

Calculate the degree of operating leverage, Degree of Financial Leverage and the Degree of Combined Leverage for
the following Firms and interpret the results.

Firm P Q R

1. Output 3,00,000 75,000 5,00,000

2. Fixed Cost (Rs.)
3. Unit Variable Costs (Rs.) 3,50,000 7,00,000 75,000
4. Interest Expenses (Rs.)
5. Unit Selling Price (Rs.)
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1.00 7.50 0,10

25,000 40,000 -

3.00 25.00 0.50

20. Financial Leverages – Computation and Interpretation

The following data is given in respect of three companies – a) Degree of Financial Leverage, b) EPS if rate of EBIT
on capital Employed is (i) 25% (ii) 10% and (iii) 8%. Interest the results and ascertain which Company is favourably
leverage. [Assume that Face Value per Equity Share is Rs. 10 and the Tax Rate is 40% ]

Particulars Company A Company B Company C

Equity Share Capital Rs. 10 lakhs Rs. 5 Lakhs Rs. 1 Lakhs

10% Debentures NIL Rs. 5 Lakhs Rs. 9 Lakhs

Total Capital Employed Rs. 10 Lakhs Rs. 10 Lakhs Rs. 10 lakhs

21. Combined Leverages

A firm has sales of Rs.75 Lakhs. Its variable Cost and Fixed Costs are Rs. 42 Lakhs and Rs. 6 Lakhs respectively. It has
a Debt of Rs. 45 Lakhs at 9% and Equity of Rs. 55 Lakhs.

1. What is the Firm’s ROI ?

2. Does the Firm have a favourable financial leverage ?

3. If the Firm belongs to an industry whose asset turnover is 3, does it have a high or low asset leverage ?

4. What are the operating, financial and combined leverage of the Firm ?

5. If sales drop to Rs. 50 lakhs, what will be new EBIT ?

6. At what level the EBT of the Firm will be equal to zero ?

22. Effect of alternative financing methods on ROE

Karuna Ltd, a widely held Company is considering a major expansion of its production facilities and the following
alternatives are available –

Alternatives A B C

Share Capital Rs. 50 Lakhs Rs. 20 Lakhs Rs. 10 Lakhs

14% Debentures - Rs. 20 Lakhs Rs. 15 Lakhs

Loan from Financial Institution at 18% Interest - Rs. 20 Lakhs Rs. 25 Lakhs

Expected rate of return before tax is 25%. The rate of dividend of the Company is not less than 20%. The Company
at present has low debt. Corporate taxation is 50%. Which of the alternatives would you choose?

23. Ratios and Leverage, Gearing Effect

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A Company had the following Balance Sheet as on 31st March 2006 (Rs. Crores)

Liabilities and Equity Rs. Cores Assets Rs. Crores

Equity Share Capital (1 Crore Shares of Rs. 10 each) 10 Fixed Assets (Net) 25

Reserves and Surplus 2 Current Assets 15

15% Debentures 20

Current Liabilities 8

Total 40 Total 40

Additional Information given is as under –

Fixed Costs per annum (excluding interest) : Rs. 8 Crores

Variable Operating Costs Ratio : 65%

Total Assets Turnover Ratio : 2.5

Income tax Rate : 40%

Calculate the following & comment – (1) Earning Per Share, (2) Operating Leverage, (3) Financial Leverage, (4)
Combined Leverage

24.The following details of P Ltd. for the year ended 31.3.2016 are furnished :

Operating leverage 3:1

Financial leverage 2: 1
Interest charges per annum Rs. 20 lakhs
Corporate tax rate 50%.
Variable cost as the percentage sales 60%.
Prepare the income statement of the company. [Ans : EATESH 10,00,000] [2017]

25. If the combined leverage and operating leverage of a company are 2.5 and 1.25 respectively, find the financial
leverage and P/V ratio; give that the equity dividend per share is Rs 2, interest payable per year is Rs 2 lakhs, total
fixed cost Rs 1 lakh and sales Rs 20 lakh. [2015]

26.X Ltd. is considering two alternative plans. Following information relates to these plans :

Plan – A Plan – b

Equity Share (Rs.10 each) 2,00,000 1,00,000

12% Debenture (Rs.) - 1,00,000

Profit after tax (Rs.) 28,000 19,600

Price-Earning ratio 11 7.5

Which of the plans is preferable considering the wealth maximization objective ?

[Ans : Plan- A should be chosen] [2016]

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26. A simplified income statement of fortune Ltd. is give below:

Sales Rs 12,00,000
Variable cost Rs 9,00,000
Fixed cost Rs 1,00,000
EBIT Rs 2,00,000
Interest Rs 70,000
Tax (30%) Rs 39,000
Net Income Rs 91,000
Calculate the following:
a) Degree of operating leverage
b) Degree of financial leverage
c) Degree of combination leverage [2015(G)]
27. X. Ltd is considering two alternative financial plans. Following information relates to these plans:
Plan –A Plan- B
Equity Share (Rs 10 each) 2,00,000 1,00,000
12% Debenture -- 1,00,000
Profit after tax 28,000 19,600
Price- Earning Ratio 11 7.5

Which of the plans is preferable considering the wealth maximization objective? [2016(H)]

28. Zica Ltd provides you the following information:

Capital structure: 12% Debenture Rs 2,00,000 9% Preference Share Capital Rs. 3,00,000 and 4,000 Equity
Shares of Rs 100 each.
Revenue and operating cost details: Sale 3,000 units @ Rs. 600 p.u; Variable Operating Cost p.u Rs.350 Fixed
Operating cost Rs 3,20,000
Compute Income Tax rate and Dividend Distribution Tax rate may be assumed at 30 % and 10% respectively.
Calculate DOL, DFL and DCL of Zica ltd. Using the concept of leverage, find the percentage change in EPS
when sales increase by 10%. [2016(H)]
29. A company provides you with the following information:

Capital structure

10,000 equity share of Rs. 10 each 1,00,000

Debenture -

EBIT 2,00,000

Tax Rate 50%

Change in EBIT (+) 20%

Show the effect of proposed change in EBIT on EPS and comment on it. [2016(G)]

30. Calculate different kinds of leverage from the following information of XYZ company :

Production and Sales 1600 units

Selling price per unit Rs.30

Variable cost per unit Rs.20

Fixed Operating Costs:

Regular classes going on XI, XII (ISC,HS,CBSE), B.COM, CA, CS

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Situation A Rs.4,000

Situation B Rs.2,000

Situation C Rs.6,000

Financial alternatives : plan

I II III

Equity Rs. 15,000 Rs.10,000 Rs.5,000

Debt Carrying 10% interest Rs.5,000 Rs.10,000 Rs.15,000

How are the information relating to leverage useful in financing decisions? [2018]

31. The select financial data for two companies namely X and Y for the year ended March 2019 are as follows:

Particulars X Y

Variable expenses as a percentage of sales 75 50

Interest (Rs.in lakhs ) 300 1000

Degree of operating leverage 6 2

Degree of financial leverage 4 2

Income tax rate 0.35 0.35

(a) Prepare income statements for X and Y

(b) Comment on the financial position of the companies [2019]

Regular classes going on XI, XII (ISC,HS,CBSE), B.COM, CA, CS

Raj Kr Poddar
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Regular classes going on XI, XII (ISC,HS,CBSE), B.COM, CA, CS