363

EBT 1,00,000 S0,000

ess.:
Tax @35e, 35,000 17,500
EAT 65,000 32,500
before interest and taxes
.:
Note
EBIT = Earnings taxes
EBT= Earn1ngs belore
taxes.
EAT=Earnings after
(i.e., business risk) of KKHH LTD. is lower whercas the
opcratingrisk
b)The risk of
DDLJ LTD. is lower comnpared to that of the other company. This may
iICal
factthat DDLJ LTD. is using less debt
capital in its capital structure. But
the
wdue (business risk as well as financial risk)
to of KKHH LTD. is lower (2-5x4=10)
1otalrisk by degree of combined leverage (DCL)
he
DDLJ JLTD.(4x3=| 12) which is indicated
han
tronnthe product of
DOL and DFL.
onming
risk complexion is the main criterion of judging the companies then KKHH
| the to its lower DCL.
LTD.isbetter placedIdue
Problem: 10
arc availablc from companies A, Band Cfor the last
Following inancial results
inancialyear:
Co. A Co. B Co. C
75% 50%
Variable cost(on sales)
Rs. 40,000 Rs. 60,000 Rs. 2,00,000
Interest on borrowed capital 2:1
S:! 6:1
DOL 2:1
3:1 4:1
DFL
50% 50% 50%
Income tax rate
Band Co. C
(a) Plcase prepare income statements for Co. A, Co.
(b) Comment on the financial position and structure of these companies.
[C. A. Final--Similar]
Solution:
CompanyA:
DFL = 3 EBIT =3
1.C., FBIT
or, 3.EBIT - 3! = EBIT
or, 2.EBIT = 31
3x Rs. 40.000
Or, EBIT= -= Rs. 60,000

Again,DOL = Contribution =5 (given)

EBIT
Contribution = 5.EBIT =5 x Rs, 60,000 =Rs. 3,00,000

. Sales Value Contribution Rs 3,00,000

P/V Ratio = Rs. 9,00,000
100% - 66%
Opery aB:ting fixed
ompanDFL= cost = Contribution-EBIT = Rs. 2,40,000
4
EBIT-I = 4
EBIT
Or, 4.EBIT -4.1=EBIT
0r,
3.EBIT = 4.1
 397
Rs.
Rs.
100 Rs.
100
.VCperunit 50 100
40
Contribulionperunjt S0 45
ul
Contribution 60
S0,00,000 90,00,006
55
-Operatingfixed costs 25,00,000 60,00,000 66,00,000
EBITorPBIT 25,00,000 30,00,000 49,50,000
. Interest 20,00,000 15,00,000 16,50,000
EBTorPBT 5,00,000 12,37,500
15,00,000 4,12,500
Contribution
2
EBIT 4
EBIT 5 2
LEBT
DFL) 10
NL(=DOLx 10,00,000,
6
16]
fim has sales of Rs. variable cost of Rs. 7,00,000, operating
2.00,000 and debt of Rs. 5,00,000 at 10% rate of fixed
financialandi combined leverages ?Ifthe firm wants to interest. What are the
double up its
Earnings
einterest and tax (EBIT), how much of a rise in sales would be needed on a
gebasis?
[C.A. Final]
Fromthefollowing information available for four companies, calculate:
) EBIT
p)EPS
ble
DOL (Degree of operating leverage)
DFL (Degree of financial leverage)
) DCL (Degree of combined leverage)
urticulars P R
ling price per unit (Rs.) 15 20 25 30
Iunable cost per unit (Rs) 10 15 20 25
les Volume (Units) 20,000 25,000
ixed Costs (Rs) 30,000 40,000
30,00040,000
terest (Rs.) 50,000 60,000
15,000 25.000
a Rate (%) 40 40
35,00040,000
40 40
Io of Equity Shares 5,000 9,000 10,000 12,000
he following figures [ICWA (Final) Dec.-1996]
th
relate to two companies :
Sumai Ltd. Kumati Lid.
Rs. (in lakhs)
500 1.000
s: Variable costs
200 300
Contribution
as: Fited Costs 300 700

EBIT (Operaling) 150

150
400
300
s:Interest
EBT 50 i00
200
CaCommelcuatnet tonDOl theDELrelatye
andDCL for the ofwothemcompanies and
risk position
CA Finali)