IDEAL PROFESSIONAL ACADEMY

F.Y.BAF FM
CHAPTER 1 LEVERAGES

Q.1 Jigna Ltd sells 1,00,000 units of product. Selling price is Rs 10 per unit and variable cost is Rs 3.
If the fixed cost for the year amounts to Rs 4,00,000. Find out the effect on profit, if the
company sells 1,10,000 units and 80,000 uiits.

Q.2 Ambika Ltd sells 2,000 units per annum. The selling price per unit is Rs 300 and the variable
cost per unit is Rs 70. The fixed operating cost is Rs 60,000. Calculate Operating Leverage

Q.3 Y Ltd sells its product at Rs 20 per unit. Variable cost per unit is Rs15. find out the degree of
operating leverage for sale of Rs 3,000 units and 3,500 units. What do you understand from the
degree of operating leverage at these sales volume. Fixed cost is Rs 10,000.

Q.4 Compute financial leverage from the following information

Interest Rs 10,000
Sales (1000 units) Rs 1,00,000
Variable Cost Rs 50,000
Fixed Cost Rs 30,000

Q.5 Shruti Ltd has the following capital structure

Equity Share Capital Rs 5,00,000
10% Preference Share Capital Rs 5,00,000
8% Debentures Rs 5,50,000
The present EBIT is Rs 2,50,000. Tax rate is 50%. Calculate Financial Leverage.

Q.6 Y Ltd has sales of Rs 2,00,000. Variable cost is 50% of sales while the fixed operating cost
amounts Rs 60,000. Interest on long term loan amounted to Rs 20,000.
You are requested to calculate the operating leverage, financial leverage and combined
leverage. And also analyze the impact if sales increase by 10%

Q.7 The following information is available in respect of two firms P Ltd and Q Ltd
Particulars P Ltd Q Ltd
Sales 500 1000
Variable cost 200 300
Contribution 300 700
fixed cost 150 400
EBIT 150 300
Interest 50 100
EBT 100 200
You are required to calculate different leverages for both the firms and also comment on their
relative risk position.

Q.8 A simplified income statement of Zenith Ltd is given below. Calculate its degree of operating
leverage, degree of financial leverage and combined leverage.
Income statement for the year ending 31st March 2003
Particulars Rs
Sales 10,50,000
Variable cost 7,67,000
Fixed cost 75,000
EBIT 2,08,000
Interest 1,10,000
Taxes (30%) 29,400
Net income 68,600

Q.9 Find out operating leverage from the following data

Sales Rs 50,000
Variable Cost 60%
Fixed Cost Rs 12,000
Find out the financial leverage from the following data

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Net Worth Rs 25,00,000
Debt / Equity 3:1
Interetst Rate 12%
Operating Profit Rs 20,00,000

Q.10 From the following information available for 4 firms, calculate the Earning Before interest and
tax (EBIT), Earning per share, the operating leverage and financial leverage.
Firms
Particulars
P Q R S
Sales (in units) 20,000 25,000 30,000 40,000
selling price per unit 15 20 25 30
Variable cost per unit 10 15 20 25
Fixed cost 30,000 40,000 50,000 60,000
Interest 15,000 25,000 35,000 40,000
Tax % 40 40 40 40
No. of Equity Shares 5,000 9,000 10,000 12,000

Q.11 A firm has sales of Rs 75,00,000, Variable cost Rs 42,00,000 and fixed cost Rs 6,00,000. It has a
debt of Rs 45,00,000 at 9% and equity of Rs 55,00,000.
1. What is the firms ROI
2. Does it have a favourable Financial Leverage?
3. If the firms 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 firms?
5. If the sales drop to 50,00,000, what will be the new EBIT?

Q.12 The selected financial data for A, B and C companies for the year ended 31st March 2002 were
as follows. Prepare income statement
Particulars A B C
Variable cost as per % of sales 66.77 75 50
Interest Expenses 200 300 1000
Degree of operating leverage 5 6 2
Degree of financial leverage 3 4 2
Income tax rate % 40 40 40

Q.13 Calculate operating leverage, financial leverage and combined leverage from the following
data under situation 1 and situation 2 under plan A and B
Particulars
Installed Capacity 4000 units
Actual production and sales 75% of the capacity
Selling price Rs 30 per unit
Variable Cost Rs 15 per unit
Fixed Cost
Situation 1 Rs 15,000
Situation 2 Rs 20,000

Particulars Financial Plan A Financial Plan B

Equity 10,000 15,000
Debentures (rate if interest @ 20%) 10,000 5,000
20,000 20,000

Q.14 following is the data provided about XYZ Ltd.

Particulars Rs
Units sold 1,00,000
Selling Price per unit 4
Variable cost per unit 1.4
Fixed cost 1,50,000
Interest 60,000

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1. Calculate the degree of Operating Leverage and Financial & Combined Leverage
2. What would be the effect on these leverages if the sales are increased by 10%? Write your
comment.
.

Q.15 Given below are income statements of three firms P, Q and R

Firms
Particulars
P Q R
Sales Revenue 9,00,000 18,75,000 2,50,000
Less- Variable Expenses 3,00,000 5,62,500 50,000
Contribution 6,00,000 13,12,500 2,00,000
Less- Non Variable Expenses 3,50,000 7,00,000 75,000
EBIT 2,50,000 6,12,500 1,25,000
Less- Interest 25,000 40,000
EBT 2,25,000 5,72,500 1,25,000
Less- Tax @40% 90,000 2,29,000 50,000
EAT 1,35,000 3,43,500 75,000
Less- Dividend
on preference shares 37,500 43,500 25,000
on equity shares 75,000 2,00,000 15,000
Profit available to ESH 22,500 1,00,000 35,000

Calculate the degree of operating leverage, financial leverage and combined leverage

Q.16 The following are the operating result of a firm

1. Sales (units) 25,000
2. Interest per annum Rs 30,000
3. Selling price per unit Rs 24
4. Tax rate 50%
5. Variable cost per unit Rs 16
6. No of equity shares 10,000
7. Fixed cost per annum Rs 80,000
Calculate:-
a. Break even sales
b. Earning before interest and tax
c. Earning per share
d. Operating leverage
e. Financial leverage

Q.17 Calculate the degree of operating leverage degree of financial leverage and combined leverage
i. Sales 1,00,000 units @ Rs 2
ii. Variable cost per unit is Rs 0.70
iii. Fixed cost Rs 1,00,000
iv. Interest charges Rs 3,668

Q.18 Harish Ltd has estimated that for a new product its breakeven point is 2,000 units if the item is
sold for Rs 14 per unit. Fixed cost is Rs 10,000. The company has currently identified variable
cost of Rs 9 per unit. Calculate the degree of operating leverage for sales volume of 2500 units
and 3000 units. What do you understand from the degree of operating leverage at the sales
volume of 2500 units and 3000 units.

Q.19 The following figures are available for Arun & Company
Net Sales Rs 15 crores
EBIT as percentage of sales is 12%
Capital Employed a) Equity 5 crores, b) Preference shares 1 crores bearing 13% rate of
dividend and, c) Debt @ 15% of 3 crores
The applicable income tax to be taken as 40%
You are required to calculate
i. Return on equity of the company
ii. Operating leverage of the company. Given that its combined leverage is 3.

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Q.20 From the following information, calculate the percentage of change in earning per share, if
sales are increased by 10%
Earning before interest and tax Rs 1,120 lakhs
Profit before Tax Rs 320 lakhs
Fixed cost Rs 700 lakhs

Q.21 If the combined leverage and operating leverage figures of a company are 2.5 and 1.25
respectively. Findout the financial leverage and P/V Ratio, that the equity dividend per share
is Rs 2. Interest payable per year is 1 lakhs, total fixed cost Rs 0.50 lakhs and sales Rs 10 lakhs.

Q.22 The data relating to two company are as given below:

Particulars Company A Company B
Equity capital 6,00,000 3,50,000
12% Debentures 4,00,000 6,50,000
Output (units) p.a 60,000 15,000
Selling price per unit 30 250
Fixed cost p.a. 7,00,000 14,00,000
Variable cost p.u 10 75
You are required to calculate the operating leverage, financial leverage and combined leverage
of two companies.

Q.23 Calculate the operating leverage, financial leverage and combined leverage for the following
firms and interpret the result.
Firms Harish Arun Ayush
Output (units) 60,000 15,000 1,00,000
Fixed cost 7,200 14,000 1,500
Variable cost per unit 0.20 1.50 0.02
Interest on borrowed capital 4,000 8,000 Nil
Selling price per unit 0.60 5.00 0.10

Q.24 Compute the different leverages from the following information

Particulars Rs
Interest 22,000
Sales (2200 units) 2,20,000
Variable cost 1,10,000
Fixed cost 66,000

Q.25 Bashir Ltd produces electronic components with a selling price per unit of Rs 100. Fixed cost
amount to Rs 2,00,000. 5,000 units are produced and sold each year. Annual profits amounts to
Rs 50,000. The company’s all equity financed assets are Rs 5,00,000. The company proposes to
change its production process, adding Rs 4,00,000 to investment and Rs 50,000 to fixed
operational cost. The consequences of such a proposal are:-
i. Reduction in variable cost per unit by Rs 10
ii. Increase in output by 2,000 units.
iii. Reduction in selling price per unit to Rs 95.
Assuming an average cost of capital 10% examine the above proposal and advise whether or
not the company should make the change. Also measure the operating leverage and Break
even point.

Q.26 Premkumar Ltd furnishes the following information

Liabilities Rs Assets Rs
Equity Capital (Rs 10 each) 10,00,000 Sundry Assets 31,00,000
10% Preference capital 10,00,000
8% Debentures 11,00,000
31,00,000 31,00,000

If the return on investment is 18% and tax rate is 40%.

Calculate

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F.Y.BAF FM
i. Financial leverage
ii. Earnings per share
iii. If the asset turnover ratio is 0.60, calculate the operating leverage and combined leverage of
the firm assuming that the firms P/V Ratio is 33.33%.

Q.27 Calculate Earning per share of solid ltd and sound ltd in both situation assuming
a. 20% before tax rate of return on assets
b. 10% before tax rate of return on assets
Based on the following data
Solid Sound
Assets 100 100
Debt 50
(12% Debentures and loan)
Equity 100.00 50
(share of Rs 10 each) (Share of Rs 10 each)
Assume a 50% income tax in both the cases

Q.28 A firm has sales of Rs 150 lakhs, variable cost Rs 84 lakhs and fixed cost of Rs 12 lakhs. It has a
debt of Rs 90 lakhs at 9% and equity of Rs 110 lakhs
i. What is the firms ROI
ii. If the firm belongs to an industry whose asset turnover is , does it have a hogh or low asset
leverage?
iii. What is the operating, financial and combined leverage of the firm
iv. If the sales drop to Rs 125 lakhs, what will be the new EBIT.

Q.29 The share capital of a company is Rs 10,00,000 with shares of face value of Rs 10. The company
has debt capital of Rs 6,00,000 at 10% rate of interest. The sales of the firm are 3,00,000 units per
annum at a selling price of Rs 5 per unit and the variable cost is Rs 3 per unit. The fixed cost
amounts to Rs 2,00,000. The company pays tax at 35%. If the sales increase by 10%. Calculate
a) Percentage increase in EPS
b) Operating Leverage at both levels
c) Financial leverage at both levels

Q.30 The net sales of A Ltd is Rs 30 crores. Earnings before interest and tax of the company as a
percentage of net sales is 12%. The capital employed comprises of Rs 10 crores of equity, Rs 2
crores of 13% cumulative preference share capital and 15% Debentures of Rs 6 crores. Income
tax is 40%.
i. Calculate the return on equity for the company and indicate its segments due to the presence
of preference share capital and borrowing.
ii. Calculate the operating leverage of the company given that combined leverage is 3

Q.31 From the following information os S Ltd and G Ltd compute Operating Leverage, Financial
Leverage and Combined Leverage.
S Ltd G Ltd
Particulars Situation Situation Situation Situation
I II I II
Sales 2,00,000 1,80,000 2,00,000 1,80,000
Variable Cost 1,00,000 90,000 1,00,000 90,000
Fixed Cost 50,000 50,000 50,000 50,000
Interest 9,000 9,000 1,000 1,000
No. of Equity Shares 1,000 1,000 9,000 9,000

Q.32 Abhishek Ltd has gross sales of 980.20 crores in 2005. The other financial data for the company
are given below
Particulars Rs (crores)
Net worth 152.31
Borrowing 165.47
EBIT 43.17
Interest 34.39
Fixed cost (excluding interest) 118.23

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You are required to calculate (a) debt equity ratio, (b) interst coverage, (c) operating leverage, (d)
financial leverage, (e) combined leverage.

Q.33 Calculate Operating and financial leverage under situations A, B and C and financials plans I,
II and III respectively from the following information relating to the operation and capital
structure of Rani Ltd. Also find out the combinations of operating and financial leverage
which gives you the highest value.
Installed capacity (units) 1,200
Actual production and sales (no of units) 800
Selling price per unit(Rs) 15
Variable cost per unit (Rs) 10
Fixed Cost Situation A(Rs) 1000
Fixed Cost Situation B(Rs) 2000
Fixed Cost Situation C(Rs) 3000

Financial Plans I II III

Equity 5000 7500 2500
12% Debt 5,000 2,500 7,500

Q.34 The following projections are related to company A

Sales (units) 80,000
Variable Cost per unit 4
Fixed Cost (Rs) 2,40,000
Interest burden on debt 1,20,000
Selling price per unit (Rs) 10
On the basis of the above compute operating, financial and combined leverage

Q.35 From the following particulars prepare income statement of A Ltd and B Ltd.
Particulars A Ltd B Ltd
Degree of Combined Leverage 6 times 15 times
Degree of Operating Leverage 3 times 5 times
Variable cost as a % of sale 40% 50%
Rate of Income tax 35% 35%
Number of Equity shares 1,00,000 1,00,000
Earning per share Rs 1.30 Rs 0.65

Q.36 From the following particulars prepare income statement of M and N Ltd
Particulars M Ltd N Ltd
Degree of Combined Leverage 12 times 30 times
Degree of Operating Leverage 6 times 10 times
Variable cost as a % of sale 40% 50%
Rate of Income tax 35% 35%
Number of Equity shares 2,00,000 2,00,000
Earning per share 2.600 1.30

Q.37 Calculate the degree of operating leverage, financial leverage and combined leverage from the
following information
Particulars A B C
Sales (Rs) 3,60,000 7,50,000 1,00,000
Variable cost p.u 20 150 2
Fixed Cost 72,000 1,40,000 15,000
Output (Units) 6,000 1,500 10,000
Interest 40,000 80,000 NIL

Q.38 From the following information prepare income statement of X and Y Ltd
Particulars X Ltd Y Ltd
Financial Leverage 3 4

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Interest 20,000 30,000
Operating leverage 5 6
Variable cost as % of sales 66.67 75
Tax Rate % 35 35

Q.39 Given information for a year are Sales Rs 5,00,000. Variable cot Rs 3,00,000. Fixed operating
cost Rs 1,00,000. Interest on borrowings Rs 20,000. Calculate operating leverage and financial
leverage

Q.40 The following details of A Ltd for the year ended 31st March 2014 are furnished
Operating Leverage 3
Financial Leverage 2
Interest charged p.a. Rs 20,00,000
Corporate Tax 50%
Variable Cost as per sales 60%

Q.41 A company had the following Balance Sheet as on 31st March 2010
Crores
Liabilities Rs Assets Rs
Equity Capital (Rs 10 each) 10 Fixed Assets 25
Reserve and Surplus 2 Current Assets 15
15% Debentures 20
Current Liabilities 8
40 40

The additional information given is as under

Fixed cost p.a. (excluding interest) Rs 8 crore
Variable operating cost ratio 65%
Total asset turnover ratio 2.5
Income tax rate 40%

Q.42 Ashika manufacturing company Ltd producing textile products, has a sales of Rs 9.60 crores,
variable cost Rs 5.60 crores and fixed cost of 1.04 crores. The company has debt and equity
resources worth Rs 11.20 crore and 16 crore respectively. The cost of debt is 10%. With the data
given, you are required to calculate
i. The company’s ROI
ii. EBIT if sales decline to 6 crores.