FINANCIAL MANAGEMENT - CPC5A

PROBLEMS FROM UNIT – 2 LEVERAGES – 5 MARKS QUESTIONS

1. Q.14.B November 2019 - Leverage

Calculate operating leverage and financial leverage for Maruthi Limited
from the following information
 Number of Units Produced 50,000
 Selling Price per Unit is Rs. 50
 Variable Cost per Unit is Rs. 20
 Fixed Cost per Unit at Current Level of Sales is Rs. 15
 Interest on Debentures Rs. 1,50,000

2. Q.14.B November 2018 – Leverage

A firm sells its only product at Rs. 12 per unit. Its variable cost is Rs. 8 per
unit. Present sales are 1,000 units. Calculate the operating leverage in
each of the following situations.
a) When fixed cost is Rs. 1,000
b) When fixed cost is Rs. 1,200
c) When fixed cost is Rs. 1,500

3. Q.18.B November 2017 – leverage

 Equity share capital Rs. 1,00,000
 10% preference share capital Rs. 1,00,000
 8% Debentures Rs. 1,25,000
 The present EBIT is Rs. 50,000.
Calculate the financial leverage assuming that the company is in 50% tax
bracket.

4. Q.14.B November 2016 – Leverage

The following data are available for R and S Ltd.
Selling Price Rs. 120 per unit
Variable Cost Rs. 70 per unit
Fixed cost Rs. 2,00,000
a. What is operating leverage when R and S Ltd produces and sells 6,000
units?
b. What is the percentage change that will occur in the EBIT, if the
output increases by 5%?
c. Calculate revised operating leverage
5. Q.15.B November 2014 – Leverage
Compute the operating, financial and combined leverages from the given

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 data
Sales 50,000 units at Rs. 12 per unit
Variable cost at Rs. 8 per unit
Fixed cost Rs. 90,000 (including 10% interest on Rs. 2,50,000)

6. Q.15.B April 2016 – Leverage

Calculate leverages from the following
Rs.
Production (units) 75,000
Fixed expenses 7,00,000
Variable cost (1 unit) 7.50
Interest expenses 40,000
Selling price (1 unit) 25.00

7. Q.16.B April 2015 – Leverage

Calculate the degree of financial leverage for ‘J’ Ltd. Selling price is Rs.
150. Variable cost is Rs. 100. Fixed cost Rs. 1,20,000. Interest on debt Rs.
20,000. Tax 50%. Preference dividend Rs. 10,000, Output 10,000 units.

8. Q.14.B April 2014 – Leverage

Find the financial leverage from the following data :
 Net worth Rs. 25,00,000
 Debt equity ratio 3:1
 Interest rate 12%
 Operating profit Rs. 20,00,000

9. Q.14.B April 2013 – Leverage

A company has a choice of the following three financial plans. You are
required to calculate the financial leverage in each case and interpret it.
X Y Z
Rs. Rs. Rs.
Equity Capital 2,000 1,000 3,000
Debt 2,000 3,000 1,000
Operating Profit (EBIT) 400 400 400
Interest @ 10% on debt in all cases

FINANCIAL MANAGEMENT - CPC5A

PROBLEMS FROM UNIT – 2 LEVERAGES – 10 MARKS QUESTIONS

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1. Q.22.C November 2019 - Leverage
Calculate the operating leverage, financial leverage and the combined
leverage for the following firms and interpret the results:
P Q R
Output (units) 3,00,000 75,000 5,00,000
Fixed Cost (Rs.) 3,50,000 7,00,000 75,000
Variable Cost Per Unit (Rs.) 1 7.5 0.1
Interest Expenses (Rs.) 25,000 40,000 Nil
Unit Selling Price (Rs.) 3 25 0.5

2. Q.21.C November 2018 – Capital Structure – Leverage

A company’s capital structure consists of Rs. 10, 00,000 (shares of Rs. 100
each) equity capital and Rs. 10, 00,000, 10% debentures. The sales
increased by 20% from 1,00,000 units to 1,20,000; the selling price is Rs.
10 per unit; variable cost amount to Rs. 6 per unit and fixed expenses
amount to Rs. 2,00,000. The rate of income tax is assumed to be 50%.
You are required to calculate:
a) The percentage increase in EPS
b) The degree of financial leverage at 1,00,000 units and 1,20,000
units
c) The degree of operating leverage at 1, 00,000 units and 1, 20,000
units. Comment on the risk position of firm.

3. Q.24.C November 2017 – Capital Structure - Leverage

A firm has sales of Rs. 10, 00,000 variable cost of Rs. 7, 00,000 and fixed
costs of Rs. 2, 00,000 and debt of Rs. 5, 00,000 at 10% rate of interest.
What are the operating, financial and combined leverages? If the firm
wants to double up its earnings before interest and tax (EBIT) how much
of rise in sales would be needed on a percentage basis.

4. Q.21.C November 2016 – Capital Structure – Leverage

The capital structure of Hindustan Corporation Ltd. Consists of equity
share capital of Rs. 10, 00,000 (shares of Rs. 100 par value) and Rs. 10,
00,000 of 10% debentures. Sales has increased from 1, 00,000 units to 1,
20,000 units, the selling price is Rs. 10 per unit. Variable cost amounts to

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 Rs. 6 per unit and fixed expenses amount to Rs. 2, 00,000. The income tax
is assumed to be 50%
You are required to calculate the following:
a) The percentage increase in earnings per share
b) Degree of operating leverage at 1,00,000 units and 1,20,000 units
c) Degree of financial leverage at 1,00,000 units and 1,20,000 units
comment on the risk position of the firm

5. Q.20.C November 2015 – Leverage

A company has a choice of the following four financial plans. You are
required to calculate the financial leverage in each case.
   Plan A Plan B Plan C Plan D
Equity Capital 3,000 2,000 1,000 500
Debt 1,000 2,000 3,000 3,500
Operating Profit (EBIT) 400 400 400 400
Interest @ 10% on debt in all cases.

6. Q.21.C November 2014 – Leverage

The capital structure of Hindustan Corporation Ltd consists of equity
share capital or Rs. 10, 00,000 (shares of Rs. 100 each) and Rs. 10, 00,000
of 10% debentures. Sales have increased from 1,00,000 units to 1,20,000
units, the selling price is Rs. 10 per unit; variable cost at Rs. 6 per unit and
fixed expenses amount to Rs. 2,00,000. The income tax rate is assumed to
be 50%. You are required to calculate the following
a) Percentage increase in earnings per share
b) Operating leverage at 1,00,000 units and 1,20,000 units
c) Financial leverage at 1,00,000 units and 1,20,000 units
d) Comment on the risk position of the firm

7. Q.22.C April 2016 – Leverage

Calculate the operating leverages, financial leverage and the combined
leverage for the following firms.
  P Q R
Output (Units) 3,00,000 75,000 5,00,000
Fixed cost (Rs.) 3,50,000 7,00,000 75,000
Variable cost per unit (Rs.) 1 7.50 0.10

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 Interest expenses (Rs.) 25,000 40,000 –
Unit selling price (Rs.) 3 25 0.50

8. Q.21.C April 2015 – Leverage

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 cost (Rs.) 3,50,000 7,00,000 75,000
Variable cost per unit (Rs.) 1 7.50 0.10
Interest expenses (Rs.) 25,000 40,000 –
Unit selling price (Rs.) 3 25 0.50

9. Q.20.C April 2014 – Leverage

Calculate financial leverage and operating leverage under situations A and
B and financial plan I and II respectively from the following information
relating to the operation and capital structure of ABC Ltd.
Installed capacity 1000 units
Actual production and sales 800 units
Selling price per unit Rs. 20
Variable cost per unit Rs. 15
Fixed cost : Situation A Rs. 800
Fixed cost : Situation B Rs. 1,500
Financial plan
Capital structure I II
Equity capital 5,000 7,000
Debt at 10% 5,000 2,000

10. Q.23.C April 2014 – Leverage

Calculate financial leverage and operating leverage under situations A and
B and financial plan I and II respectively from the following information
relating to the operation and capital structure of ABC Ltd.
Installed capacity 1000 units
Actual production and sales 800 units
Selling price per unit Rs. 20
Variable cost per unit Rs. 15
Fixed cost : Situation A Rs. 800

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 Fixed cost : Situation B Rs. 1,500
Financial plan
Capital structure I II
Equity capital 5,000 7,000
Debt at 10% 5,000 2,000

11. Q.24.C April 2013 – Leverage

The following figures relate to two companies.
Financial plan
P Ltd. Q Ltd
Rs. in lakhs
Sales 500 1,000
Variable cost 200 300
Contribution 300 700
Fixed cost 150 400
150 300
Interest 50 100
Profit before tax 100 200

Calculate:
(a) Operating, financial and composite leverages.
(b) Comment on the risk position.

FINANCIAL MANAGEMENT - CPC5A

PROBLEMS FROM UNIT – 2 CAPITAL STRUCTURE – 5 MARKS QUESTIONS

1. Q.16.B November 2019 - Capital Structure

The earnings per share of N limited are Rs. 15 and the rate of
capitalization applicable to the company is 12%. The productivity of
earnings (r) is 12%.
Compute the market value of the company’s share if the payout is 20%

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 and 50% which is the optimum payout?

2. Q.18.B November 2019 - Capital Structure

Given the following information, you are required to compute
capitalization and capital structure.
Rs.
Equity Share Capital 10,00,000
Preference Share Capital 5,00,000
Long term loans 2,00,000
Retained Earnings 6,00,000
Capital surplus 50,000
Current Liabilities 1,50,000

3. Q.14.B November 2017 – Capital Structure

A company has earnings before interest and taxes of Rs. 1, 00,000. It
expects a return on investment at the rate of 12.5%. You are required
to find out the total value of the firm according to MM. Theory.

4. Q.16.B November 2017 – Capital Structure

A company expects a net income of Rs. 80,000. It has Rs. 2, 00,000
debentures at 8%. The equity capitalization rate of the company is 10%.
Calculate the value of the firm and over all capitalization rate according
to the net income approach (ignore income tax)

5. Q.19.B November 2017 – Capital Structure

There are two firms X and Y which are exactly identical except that X
does not use any debt in the financing while Y has Rs. 1, 00,000. 5%
debentures. Both the firms have earnings before interest and taxes of
Rs. 25,000. Equity capitalization rate is 10% corporate tax rate 50%.
Calculate the value of the firm

6. Q.13.B November 2016 – Capital Structure

Two firms X and Y are identical except in the method of financing. Firm
X has no debt while firm Y has Rs. 2, 00,000 5% debentures in financing.
Both the firms have a net operating income (EBIT) of Rs. 50,000 and
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 equity capitalization rate of 12.5%. The corporate tax rate is 50%.
Calculate the value of the firm using MM Approach.

7. Q.18.B November 2016 – Capital Structure

Blue Sky Ltd. Has an EBIT Rs. 2, 00,000. The cost of debt is 10% and the
outstanding debt is Rs. 9, 00,000. The overall capitalization rate (Ke) is
12.5%. Calculate the total value of the firm (V) and equity capitalization
rate (Ke)

8. Q.18.B November 2015 – Capital Structure

ABC Ltd has an EBIT of Rs. 1, 00,000. The cost of debt is 10% and the
outstanding debt amount to Rs. 4, 00,000. Presuming the overall
capitalization rate as 12.5%. Calculate the total value of the firm and
the equity capitalization rate.

9. Q.19.B November 2014 – Earnings Per Share

Consider the following information for strong Ltd
EBIT Rs. 1,120 Lakh
Fixed Cost Rs. 700 Lakh
PBT Rs. 320 Lakh
Calculate the percentage of change in EPS if sales increases by 5%

10. Q.15.B April 2015 – Capital Structure

Find the following information, find out the capital structure.
Rs.
Equity Share Capital 10,00,000
Preference Share Capital 5,00,000
Long term loans and debentures 2,00,000
Retained Earnings 6,00,000
Capital surplus 50,000
Current Liabilities 1,50,000
25,00,000

11. Q.19.B April 2015 – Capital Structure

A company expects a net income of Rs. 80,000. It has Rs. 2, 00,000 8%
debentures. The equity capitalization rate of the company is 10%.
Calculate the value of the firm according to Net Income Approach.
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12. Q.19.B April 2014 – Capital Structure
From the following information find out the capital structure.
 Equity share capital Rs. 10,00,000;
 Preference share capital Rs. 50,00,000;
 Long term loans and debentures Rs. 2,00,000;
 Retained earnings Rs. 6,00,000
 Capital surplus Rs. 50,000;
 Current liabilities Rs. 1, 50,000.

13. Q.16.B April 2012 – Value of the Firm

From the data given below, calculate the value of firm according MM Model.
  X (Rs.) Y (Rs.)
Operating Income 50,000 50,000
Interest 0 10,000
Net Income 50,000 40,000
Call of equity 0.10 0.11
Market value of equity share 5,00,000 30,000
Market value of debentures (V) 0 20,000
Total (S + V) 5,00,000 5,60,000
Assume no corporate tax and overall cost of capital is 12.5%.
FINANCIAL MANAGEMENT - CPC5A
PROBLEMS FROM UNIT – 2 CAPITAL STRUCTURE – 10 MARKS QUESTIONS

1. Q.22.C November 2017 – Capital Structure

The following estimate relate to the company’s most desirable capital
mix of debentures and equity (after-tax) calculate optimal capital mix
Debt as % on capital
Cost of Debt % Cost of Equity %
employed
0 5.00 12.00
10 5.00 12.00
20 5.00 12.50
30 5.50 13.00
40 6.00 14.00

2. Q.21.C November 2015 – Capital Structure

B Ltd has a share capital of Rs. 1, 00,000 divided into shares of Rs. Each. It
has a major expansion programme requiring an investment of another
Rs. 50,000. The management is considering the following alternatives for
raising this amount.

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  Issue of 5,000 equity shares of Rs. 10 each
 Issue of 5,000, 12% preference shares of Rs. 10 each
 Issue of 10% debentures of Rs. 50,000
The company’s present earnings before interest and tax are Rs. 40,000
p.a. You are required to calculate the effect of each of the above modes
of financing on the earnings per share presuming EBIT increases by 10%

3. Q.23.C APRIL 2016 – Capital Structure

A company wishes to determine the optimal capital structure. From the
following selected information supplied to you, determine the optimal
capital structure of the company.
After tax
Debt Ke
Situation Equity cost of
(Rs.) (%)
debt (%)
1 4,00,000 1,00,000 9 10
2 2,50,000 2,50,000 6 11
3 1,00,000 400000.00 5 14

1. Q.14.B November 2019 - Leverage

Calculate operating leverage and financial leverage for Maruthi Limited
from the following information
 Number of Units Produced 50,000
 Selling Price per Unit is Rs. 50
 Variable Cost per Unit is Rs. 20
 Fixed Cost per Unit at Current Level of Sales is Rs. 15
 Interest on Debentures Rs. 1,50,000

Answer
Format for Net Income Statement

Total Amount
Particulars Cost Per Unit (Rs.)
(Rs)
Sales 50000 units × Rs. 50 2500000
(-) Variable Cost 50000 units × Rs. 20 1000000
Contribution   1500000
(-) Fixed Cost 50000 units × Rs. 15 750000
EBIT   750000
(-) Interest on Debentures   150000
EBT   600000

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 Operating Leverage =
1500000 / 75000 = 2
Contribution / EBIT

Financial Leverage =
750000 / 600000 = 1.25
EBIT / EBT

2. Q.14.B November 2018 – Leverage

A firm sells its only product at Rs. 12 per unit. Its variable cost is Rs. 8 per
unit. Present sales are 1,000 units. Calculate the operating leverage in
each of the following situations.
a) When fixed cost is Rs. 1,000
b) When fixed cost is Rs. 1,200
c) When fixed cost is Rs. 1,500

Answer
Format for Net Income Statement

When fixed When fixed When

Particulars Details cost is Rs. cost is Rs. fixed cost
1,000 1,200 is Rs. 1,500

Sales 1000 units × Rs. 12 12,000 12,000 12,000

(-) Variable Cost 1000 units × Rs. 8 8,000 8,000 8,000

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 Contribution   4,000 4,000 4,000

(-) Fixed Cost Refer the problem 1,000 1,200 1,500

EBIT   3,000 2,800 2,500

Contribution /
Operating Leverage 1.333 1.429 1.600
EBIT

3. Q.18.B November 2017 – leverage

 Equity share capital Rs. 1,00,000
 10% preference share capital Rs. 1,00,000
 8% Debentures Rs. 1,25,000
 The present EBIT is Rs. 50,000.
Calculate the financial leverage assuming that the company is in 50% tax
bracket.
Answer

Format for Net Income Statement

Total Amount
Particulars Cost Per Unit (Rs.)
(Rs)
Referred as Income Or
present EBIT 50,000
Sales
(-) 8% Interest on Debentures (8/100 × 125,000) 10,000

EBT   40,000

Financial Leverage = EBIT / EBT = 50000 / 40000 1.25

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4. Q.14.B November 2016 – Leverage
The following data are available for R and S Ltd.
Selling Price Rs. 120 per unit
Variable Cost Rs. 70 per unit
Fixed cost Rs. 2,00,000
a) What is operating leverage when R and S Ltd produces and sells
6,000 units?
b) What is the percentage change that will occur in the EBIT, if the
output increases by 5%?
c) Calculate revised operating leverage

Answer
Format for Net Income Statement

a) What is operating leverage when R and S Ltd produces and sells 6,000 units?
Particulars Details R Ltd S Ltd
Sales 6000 units × Rs. 120 720,000 720,000
(-) Variable Cost 6000 units × Rs. 70 420,000 420,000
Contribution   300,000 300,000
(-) Fixed Cost Rs. 2,00,000 200,000 200,000
EBIT   100,000 100,000
Operating Leverage Contribution / EBIT 3 3

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b) What is the percentage change that will occur in the EBIT, if the output increases by 5%?
& c) Calculate revised operating leverage
Particulars Details R Ltd S Ltd
5% output Rises = (5/100)*600) =
300
Sales 756,000 756,000
Hence total output = 6000+300 =
6300
(-) Variable Cost 6300 units × Rs. 70 441,000 441,000
Contribution   315,000 315,000
(-) Fixed Cost Rs. 2,00,000 200,000 200,000
EBIT   115,000 115,000
Operating Leverage Contribution / EBIT 3 3

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