Financial Management PROBLEMS FROM UNIT - 2
Financial Management PROBLEMS FROM UNIT - 2
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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)
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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
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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
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Interest expenses (Rs.) 25,000 40,000 –
Unit selling price (Rs.) 3 25 0.50
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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
Calculate:
(a) Operating, financial and composite leverages.
(b) Comment on the risk position.
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and 50% which is the optimum payout?
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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%
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
Answer
Format for Net Income Statement
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Contribution 4,000 4,000 4,000
Contribution /
Operating Leverage 1.333 1.429 1.600
EBIT
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
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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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