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Leverages MBA (Sem II) – Module 2 CA. Pramod Prabhu. S.H. Operating Leverage: 1. Following data are taken from records of a company: Installed Capacity Operating Capacity Selling Price p.u. VC p.u. Fixed Costs: Situation A Situation B Situation C 1,000 Units 800 Units Rs. 10 Rs. 7 Rs. 800 Rs. 1,200 Rs. 1,500 Calculate DOL, BEP & MOS in each situation. Financial Leverage: 2. A Ltd has Equity capital of Rs. 5 lacs divided into shares of Rs. 100 each. It wishes to raise further Rs. 3 lacs for expansion. The following Plans are available: a. All Equity Shares b. Rs. 1 lakh in Equity Shares & Rs. 2 lakh in 10% debentures c. All debt @ 10% d. Rs. 1 Lakh in Equity shares & Rs. 2 lakhs in 8% Preference Shares The Company’s existing EBIT is Rs. 1,50,000. Corporate tax rate is 50%. Determine the EPS on each Plan & Comment on Implications of FL. 3. Calculate the EPS of X Ltd & Y Ltd assuming i) 20% before tax rate of return on Assets ii) 10% before tax rate of return on Assets, based on the following: Leverages MBA (Sem II) – Module 2 CA. Pramod Prabhu. S.H. Particulars Assets Debt (12%) Equity (Shares @ Rs. 10 each) X Ltd (Rs. in Lakhs) 200 200 Y Ltd (Rs. in Lakhs) 200 100 100 Assume a 50% Tax in both cases. Comment on Financial Leverage. 4. XYZ currently has an Equity Capital of Rs. 40 lacs consisting 40000 equity shares of Rs. 100 each. The management plans to raise another Rs. 30 lakhs to finance a major expansion through the following means: i) Entirely through Equity Shares ii) Rs. 15 lakhs in equity shares of Rs. 100 each & balance in 8% debentures iii)Rs. 10 lakhs in equity shares of Rs. 100 each & balance through long term borrowings @ 9% rate of Interest iv)Rs. 15 lakhs in equity shares of Rs. 100 each & balance through Preference shares with 5% dividend The company’s expected EBIT is Rs. 15 lakhs. Assuming Corporate tax rate to be 50%, determine the EPS & comment on the Financial Leverage that is authorised under each of the above schemes of financing Combined (Composite) Leverage: 5. A Company has sales of Rs. 5 lakhs, VC of Rs. 3 lakhs, Fixed Costs of Rs. 1 lakh & Long term loans of Rs. 4 lakhs @ 10% Interest rate. Compute DCL. Leverages & Risk Analysis: 6. The following figures relate to two companies. You are required to i) Compute the Operating, Financial & Combined leverages for the companies ii) Comment on their relative risk position Leverages MBA (Sem II) – Module 2 CA. Pramod Prabhu. S.H. Particulars Sales Less: Variable Costs Contribution Less: Fixed Costs EBIT Less: Interest EBT P Ltd ( Rs in lacs) 500 (200) 300 (150) 150 (50) 100 Q Ltd (Rs in Lacs) 1000 (300) 700 (400) 300 (100) 200 Practice Questions: 7. A firm has sales of Rs. 20 lacs, VC of Rs. 14 lacs, Fixed Costs of Rs. 4 lacs and debt @ 10% interest rate – Rs. 10 lacs. Find DOL, DFL & DCL. If the firm wants to double its EBIT, how much rise in sales would be required on a % basis? 8. Leverages MBA (Sem II) – Module 2 CA. Pramod Prabhu. S.H. 9. A firm has Sales of Rs. 75 lacs. Its Variable Costs & Fixed Costs are Rs. 42 lacs & Rs. 6 lacs respectively. It has a debt of Rs. 45 lacs @ 9% Interest & equity of Rs. 55 lacs. i) What is the Firm’s ROI ii) Does the firm have a favorable FL? iii)Calculate DOL,DFL & DCL iv) If Sales drop to Rs. 50 lacs, What is the new EBIT? v) At what level does EBT of the firm equals Zero. 10. The Capital Structure of ABC Ltd consists of Ordinary Share Capital of Rs. 5 lacs (@ Rs. 100 per Share) & 10% debentures of Rs. 100 each – Rs. 5 lacs. Sales increased from 50,000 to 60,000 units, the Selling Price being Rs. 12 p.u, VC amounting to Rs. 8 p.u & Fixed Expenses amounting to Rs. 1 lakh. The Income tax rate is assumed to be 50%. 1. Calculate the % increase in EPS 2. DFL at 50,000 units & 60,000 units 3. DOL at 50,000 units & 60,000 units 4. Comment on behavior of EPS, OL & FL on increase of sales 11. i) When will a firm be considered as favorably leveraged? ii) A firm’s DCL is 6 times, while DFL is 3 times. What is the relationship between Contribution & EBIT? iii) A firm’s DOL is 4 times, while DCL is 10 times. What is the relationship between EBIT & EBT? Leverages MBA (Sem II) – Module 2 CA. Pramod Prabhu. S.H. 12. Complete the following statement from the given data: Statement Data PAT = 5% of Sales IT Rate = 50% DOL = 4 times Debt Component in Capital – NIL VC = 3 lakhs Sales Less: VC Contribution Less: FC EBIT Less: Income Tax PAT 13. From the following information, prepare the Income statement of Companies A,B & C Particulars FL Interest OL VC Ratio IT Rate A 3:1 Rs. 200 4:1 66.67% 45% B 4:1 Rs. 300 5:1 75% 45% C 2:1 Rs. 1,000 3:1 50% 45% Leverages MBA (Sem II) – Module 2 CA. Pramod Prabhu. S.H. 14. The Balance Sheet of Alpha Ltd is given below: Liabilities ESC (Rs. 10 each) 10% Long Term Debt Retained Earnings Current Liabilities Rs 90,000 1,20,000 30,000 60,000 TOTAL 3,00,000 Assets Net FA Current Assets Rs 2,25,000 75,000 TOTAL 3,00,000 The Company’s Total Assets Turnover ratio is 3, Fixed Operating Costs – Rs. 1,50,000 & Variable Operating Costs Ratio - 50%. IT Rate – 50%. i) Calculate the different types of leverages for the Company ii)Determine the likely level of EBIT, if EPS is a) Re.1 b) Rs. 2 c) 0 -----------------------------------