LEVERAGES

Q 1. The following information is available in respect of two firms, P Ltd. and Q Ltd: (Figures in Rs.
Lakhs)
Particulars P Ltd. Q Ltd.
Rs. Rs.
Sales 500 1,000
- Variable Cost 200 300
Contribution 300 700
- Fixed Cost 150 400
EBIT 150 300
- Interest 50 100
Profit Before Tax 100 200
You are required to calculate different leverages for both the firms and also comment on their
relative risk position.

Q 2. A simplified Income Statement of Zenith Ltd. is given below. Calculate its degree of operating
leverage, degree of financial leverage and degree of combined leverage.
Zenith Ltd. – 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 3. From the following information available for 4 firms, calculate the Earnings before Interest and Tax
(EBIT), Earnings per Share (ESP), the Operating Leverage and the Financial Leverage:
Particulars Firms
P Q R S
Sales (in Units) 20,000 25,000 30,000 40,000
Selling Price per unit (Rs.) 15 20 25 30
Variable Cost per unit (Rs.) 10 15 20 25
Fixed Costs (Rs.) 30,000 40,000 50,000 60,000
Interest (Rs.) 15,000 25,000 35,000 40,000
Tax % 40 40 40 40
Number of Equity Shares 5,000 9,000 10,000 12,000

Q 4. The selected financial data for A, B, and C companies for the year ended 31st March, 2002 were as
follows :
Particulars A B C
Variable Cost as a Percentage of Sales 66.2/3 75 50
Interest Expenses 200 300 1,000
Degree of Operating Leverage 58 6 2
Degree of Financial Leverage 3 4 2
Income Tax Rate % 40 40 40
 Prepare an Income Statement for each of the three companies.

Q.5 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 Cost: Rs. 1,00,000
Interest charges: Rs. 3,669
Which combinations of operation and financial leverages constitute (a) risky situation and (b) an
ideal situation?

Q. 6 Calculate the degree of operating leverage. Degree of financial leverage and the degree of combined
leverage for the following firms and interpret the results:
P Q R
Output (Units) 3,00,000 75,000 5,00,000
Fixed Costs (Rs.) 3,50,000 7,00,000 75,000
Units Variable Cost (Rs.) 1.00 7.50 0.10
Interest Expenses (Rs.) 25,000 40,000 Nil
Units Selling Price (Rs.) 3.00 25,000 0.50

Q.7 Calculate operating leverage and financial leverage under situations A, B and C financial plans I, II
and III respectively from the following information relating to the operation and capital structure of
XYZ Co. Also find 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
Situation C Rs. 3,000
Capital structure: Financial Plans I II III
Rs. Rs. Rs.
Equity 5,000 7,500 2,500
Debt 5,000 2,500 7,500
Cost of debt -- -- 12%

Q.8 An analytical statement of AB Company is shown below: It is based on an output (sales) level of
80,000 units):
Sales 9,60,000
Variable cost 5,60,000
Revenue before fixed cost 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 date.

Q.9 The following figures relate to two companies:

P Ltd Q. Ltd
(Rs. In lakhs)
Sales 500 1,000
Variable cost 200 300
Contribution 300 700
Fixed Costs 150 400
150 300
Interest 50 100
Profit before tax 100 200
You are required to:
(i) Calculate the operating, leverage, financial and combined leverages for two companies; and (ii)
Comment on the relative risk position of them.

Q.10 (i) Find the operating leverage from the following data:
Sales Rs. 50,000
Variables costs 60%
Fixed Costs Rs. 12,000
(ii) Find the financial leverage from the following data:
Net worth Rs. 25,00,000
Debt / Equity 3/1
Interest Rate 12%
Operating Profit Rs. 20,00,000

Q.11 Calculate the operating leverage, financial leverage and combined leverage from the following data:
Under situation I and II Financial Plan A and B
Installed Capacity 4,000 units
Actual Production and Sales 75% of the Capacity
Selling Price Rs. 30 per unit
Variable Cost Rs. 15 per unit

Fixed Cost:
Under Situation I Rs. 15,000
Under Situation II Rs. 20,000
Capital structure:
Financial Plant
A B
Rs. Rs.
 Equity 10,000 15,000
Debt (Rate of interest at 20%) 10,000 5,000
20,000 20,000
Q.12 From the following prepare Income Statement of Company A, B, and C. Briefly comment on each
company’s performance:
Company A B C
Financial Leverage 3:1 4:1 2:1
Interest Rs.200 Rs.300 Rs.1,000
Operation Leverage 4:1 5:1 3:1
Variable Cost as a Percentage to sale 66% 75% 50%
Income - Tax Rate 45% 45% 45%