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    Corporate Finance Model Answer

    Uploaded by

    srikanth
    The document provides a model answer to a corporate finance question calculating operating and financial leverage for Simplex Ltd. It shows: 1) Simplex Ltd's sales were Rs. 10 lacs with 50% variable costs of Rs. 5 lacs and fixed costs of Rs. 2.5 lacs, leaving earnings before interest and taxes (EBIT) of Rs. 2.5 lacs. 2) Operating leverage was calculated at 2 times and financial leverage at 1.146 times. 3) For EBIT to double to Rs. 5 lacs, sales would need to increase 50% to Rs. 15 lacs.

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    Corporate Finance Model Answer

    Uploaded by

    srikanth
    151 views3 pages
    The document provides a model answer to a corporate finance question calculating operating and financial leverage for Simplex Ltd. It shows: 1) Simplex Ltd's sales were Rs. 10 lacs with 50% variable costs of Rs. 5 lacs and fixed costs of Rs. 2.5 lacs, leaving earnings before interest and taxes (EBIT) of Rs. 2.5 lacs. 2) Operating leverage was calculated at 2 times and financial leverage at 1.146 times. 3) For EBIT to double to Rs. 5 lacs, sales would need to increase 50% to Rs. 15 lacs.

    Original Description:

    Corporate Finance Model Answer

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    The document provides a model answer to a corporate finance question calculating operating and financial leverage for Simplex Ltd. It shows: 1) Simplex Ltd's sales were Rs. 10 lacs with 50% variable costs of Rs. 5 lacs and fixed costs of Rs. 2.5 lacs, leaving earnings before interest and taxes (EBIT) of Rs. 2.5 lacs. 2) Operating leverage was calculated at 2 times and financial leverage at 1.146 times. 3) For EBIT to double to Rs. 5 lacs, sales would need to increase 50% to Rs. 15 lacs.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    151 views3 pages

    Corporate Finance Model Answer

    Uploaded by

    srikanth
    The document provides a model answer to a corporate finance question calculating operating and financial leverage for Simplex Ltd. It shows: 1) Simplex Ltd's sales were Rs. 10 lacs with 50% variable costs of Rs. 5 lacs and fixed costs of Rs. 2.5 lacs, leaving earnings before interest and taxes (EBIT) of Rs. 2.5 lacs. 2) Operating leverage was calculated at 2 times and financial leverage at 1.146 times. 3) For EBIT to double to Rs. 5 lacs, sales would need to increase 50% to Rs. 15 lacs.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    NMIMS Global Access

    School for Continuing Education (NGA-SCE)


    Course: Corporate Finance
    Model Answer

    Important Instructions:

    - The below questions and answers are only for reference purpose “Model answers” and will
    help you understand how to prepare Assignments
    - Please do not use this for submitting any assignment
    - Understand the following:
     3 major aspects of Assignment [Introduction, Concept and conclusion]
     Marks allotted for every section

    Question:
    Simplex Ltd generated sales for the year amounting Rs 10 lacs. The variable cost is 50 % of sales. The
    fixed cost being 25 % of sales that is, Rs 250000. The company also has an interest obligation as the
    amount of debt employed by the company in its capital structure is Rs 4 lacs @ 8 %.

    You are required to calculate both the operating and financial leverage for the company. Further,
    What if the firm wants to double its earnings before interest and taxes (EBIT), how much of an increase
    in sales would be essential on a percentage basis? Give sufficient reasons and calculations supporting
    your answer.

    Answer:

    Particulars Amount Marks allotted

    Sales 1000000

    Less : variable cost (500000)

    = contribution 500000 1 mark

    Less: fixed cost (250000)

    = EBIT 250000 1 mark

    Less: interest (32000)


    NMIMS Global Access
    School for Continuing Education (NGA-SCE)
    Course: Corporate Finance
    Model Answer

    = EBT 218000 1 mark

    Operating leverage 500000/ 1 mark for formula

    = contribution / EBIT 250000 1 mark for correct


    answer
    = 2 times

    Financial leverage 250000/ 1 mark for formula

    =EBIT/EBT 218000 1 mark for correct


    answer
    =1.146 times

    Sales required to double the EBIT can be calculated as


    under

    Operating leverage is two times it means that 50 %


    increase in sales volume causes a 100% increase in the
    operating profit or EBIT 1 mark for the
    Thus , at the sales of Rs15 lacs , the EBIT will be Rs 5 interpretation
    lacs

    The same can be verified as under:

    Sales 1500000

    Less : variable cost (750000)

    = contribution 750000 1 mark for the


    contribution
    Less: fixed cost (250000)
    1 mark for the EBIT
    = EBIT 500000
    NMIMS Global Access
    School for Continuing Education (NGA-SCE)
    Course: Corporate Finance
    Model Answer

    Total marks 10 marks

    ***************

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