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Leverage

The document outlines calculations for operating, financial, and combined leverage for various firms, providing specific financial data for analysis. It includes scenarios for determining the impact of changes in sales and costs on leverages, as well as balance sheet evaluations for different companies. Additionally, it compares the financial positions of two companies based on their leverage ratios and other financial metrics.

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notsoserious9145
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12 views2 pages

Leverage

The document outlines calculations for operating, financial, and combined leverage for various firms, providing specific financial data for analysis. It includes scenarios for determining the impact of changes in sales and costs on leverages, as well as balance sheet evaluations for different companies. Additionally, it compares the financial positions of two companies based on their leverage ratios and other financial metrics.

Uploaded by

notsoserious9145
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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Leverage

1. Calculate the degree of operating leverage (DOL), degree of financial leverage (DFL), and degree of combined
leverage(DCL) for the following firms and interpret the results:

Firms A B C
Output(units) 60000 15000 100000
Fixed cost(Rs) 7000 14000 1500
Variable cost per unit(Rs) .20 1.50 .02
Interest on borrowed capital(Rs) 4000 8000 Nil
Selling price per unit(Rs) .60 5.00 .10

What combination of OL and FL constitutes a Risky and Ideal situation?

2. A firm has sales of Rs. 1000000, variable costs of Rs 700000, fixed costs of Rs 200000, and debt of Rs 500000 at a 10%
rate of interest. What are the operating financial and combined leverages? If the firm wants to double up its Earning
before interest and tax (EBIT), how much of a rise in sales would be needed on a percentage basis

3. ABC ltd had the following Balance Sheet for the year ended 31-12-2010.

Liabilities Rs Assets Rs
Equity Capital ( one lakhs shares of Rs 10 1000000 Fixed assets 2500000
each)
Reserves and surplus 200000 Current assets 1500000
15% Debenture 2000000
Current liabilities. 800000
4000000 4000000
Additional information is given:
Fixed costs per annum: Rs.800000.
(excluding interest)
Variable operating cost ratio: 80%.
Total assets turnover: 3
Income-tax: 30%
Required:
1. Operating leverage.
2. Financial leverage.
3. Combined leverage.

4. A company has an operating leverage of 1.2 as against 1.25 during the previous year. If the current fixed costs is 25%
more than that of the previous year, to what extent has the contribution earned by the firm changed over the previous
year.

5. The Balance Sheet of P ltd is as follows


Liabilities Rs. Assets Rs.
Equity Capital( Rs,10 per share) 60000 Net fixed Assets 150000
10% long term loan 80000 Current Assets 50000
Retained earnings 20000
Current liabilities 40000
200000 200000
The company’s total assets turnover ratio is 3, its fixed operating costs are Rs 100000 and its variable operating cost
ratio is 40%. The income-tax rate is 50%.
I. Calculate for the company the different types of leverages.
II. Determine the likely level of EBIT if EPS is
a) Rs.1
b) Rs.3
c) Rs.0

6. The following financial data have been furnished by A. ltd and B. ltd for the year ended 31-3-2010:
A ltd B ltd
Operating leverage 3:1 4:1
Financial leverage 2:1 3:1
Interest charges per annum Rs. 1200000 Rs. 1000000
Corporate tax rate 40% 40%
Variable cost as percentage of sales 60% 50%
Prepare Income Statement of the two companies. Also comment on the financial position and structure of the two
companies.

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