Chapter 4 - Leverages

Chapter 4
Financing Decision - Leverages
Question 1 - May 2022
Details of a company for the year ended 31st March, 2022 are given below:
Sales ₹ 86 lakhs
Profit Volume (P/V) Ratio 35%
Fixed Cost excluding interest expenses ₹ 10 lakhs
10% Debt ₹ 55 lakhs
Equity Share Capital of ₹ 10 each ₹ 75 lakhs
Income Tax Rate 40%
Required:
1. Determine company's Return on Capital Employed (Pre-tax) and EPS.
2. Does the company have a favourable financial leverage?
3. Calculate operating and combined leverages of the company.
4. Calculate percentage change in EBIT, if sales increases by 10%.
5. At what level of sales, the Earning before Tax (EBT) of the company will be equal to zero?

Question 2 - Nov 2022

The following information is available for SS Ltd.
Profit volume (PV) ratio 30%
Operating leverage 2.00
Financial leverage 1.50
Loan ₹ 1,25,000
Post-tax interest rate 5.6%
Tax rate 30%
Market Price per share (MPS) ₹ 140
Price Earnings Ratio (PER) 10
You are required to:
1. Prepare the Profit-Loss statement of SS Ltd. and
2. Find out the number of equity shares.

Question 3 - Rtp May 2022

Company P and Q are having same earnings before tax. However, the margin of safety of Company P is 0.20
and, for Company Q, is 1.25 times than that of Company P. The interest expense of Company P is ₹ 1,50,000
and, for Company Q, is 1/3rd less than that of Company P. Further, the financial leverage of Company P is 4
and, for Company Q, is 75% of Company P.
Other information is given as below:
Particulars Company P Company Q
Profit volume ratio 25% 33.33%
Tax rate 45% 45%
You are required to PREPARE Income Statement for both the companies.

Question 4 - Rtp Nov 2022

Debu Ltd. currently has an equity share capital of ₹ 1,30,00,000 consisting of 13,00,000 Equity shares. The
company is going through a major expansion plan requiring to raise funds to the tune of ₹ 78,00,000. To
finance the expansion the management has following plans:
Plan-I : Issue 7,80,000 Equity shares of ₹ 10 each.
Plan-II : Issue 5,20,000 Equity shares of ₹ 10 each and the balance through long-term borrowing at 12%
interest p.a.
Plan-III : Issue 3,90,000 Equity shares of ₹ 10 each and 39,000, 9% Debentures of ₹ 100 each.
Plan-IV : Issue 3,90,000 Equity shares of ₹ 10 each and the balance through 6% preference shares.
EBIT of the company is expected to be ₹ 52,00,000 p.a. Considering corporate tax rate @ 40%, you are required
to-
1. Calculate EPS in each of the above plans.
2. ASCERTAIN financial leverage in each plan and comment.

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Question 5 - Rtp May 2023

The selected financial data for A, B and C companies for the current year ended 31st March are as follows:
Particulars A B C
Variable Expenses as a % of sales 60 50 40
Interest ₹ 1,00,000 ₹ 4,00,000 ₹ 6,00,000
Degree of Operating Leverage 4:1 3:1 2.5:1
Degree of Financial Leverage 3:1 5:1 2.5:1
Income Tax Rate 30% 30% 30%
1. PREPARE income statement for A, B and C companies
2. COMMENT on the financial position and structure of these companies

Question 6 - Mock Oct 2022

Axar Ltd. has a Sales of ₹ 68,00,000 with a Variable cost Ratio of 60%.
The company has fixed cost of ₹16,32,000. The capital of the company comprises of 12% long term debt,
₹1,00,000 Preference Shares of ₹ 10 each carrying dividend rate of 10% and 1,50,000 equity shares.
The tax rate applicable for the company is 30%.
At current sales level, Determine the Interest, EPS and amount of debt for the firm if a 25% decline in Sales will
wipe out all the EPS.

Question 7 - Mock Oct 2022

The following information is related to Navya Company Ltd. for the year ended 31st March 2022:
Equity share capital (₹ 10 each) ₹ 65,50,000
12% Bonds of ₹ 1,00 each ₹ 60,91,400
Sales ₹ 111 lakhs
Fixed cost (excluding interest) ₹ 7,15,000
Financial leverage 1.55
Profit-volume Ratio 25%
Income Tax Applicable 30%
You are required to Calculate:
1. Operating Leverage.
2. Combined leverage; and
3. Earnings per share.
Show calculations upto two decimal points.

Question 8 - Study Material, Nov 07

CALCULATE the operating leverage for each of the four firms A, B, C and D from the following price and cost
data:
Firms
A(₹) B(₹) C(₹) D(₹)
Sale price per unit 20 32 50 70
Variable cost per unit 6 16 20 50
Fixed operating cost 60,000 40,000 1,00,000 Nil
What calculations can you draw with respect to levels of fixed cost and the degree of operating leverage
result? Explain. Assume number of units sold is 5,000.

Question 9 - Study Material, May 11

You are given two financial plans of a company which has two financial situations. The detailed information is
as under:
Installed Capacity 10,000 units
Actual Production and Sales 60% of installed capacity
Selling Price per unit ₹ 30
Variable cost per unit ₹ 20
Fixed cost Situation A = ₹ 20,000 Situation B = ₹ 25,000

Capital Structure of the company is as follows:

Financial Plans
XY (₹) XM (₹)

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Equity 12,000 35,000

Debt (Cost of Debt 12%) 40,000 10,000
52,000 45,000
You are required to calculate operating Leverage and Financial Leverage of both the plans.

Question 10 - Study Material, Rtp

(i) You are required to calculate the Operating leverage from the following data:
Sales ₹ 50,000
Variable Costs 60%
Fixed Costs ₹ 12,000

(ii) You are required to calculate the Financial Leverage from the following data:
Net Worth ₹ 25,00,000
Debt /Equity 3:1
Interest rate 12%
Operating Profit ₹ 20,00,000

Question 11 - Study Material

A Company produces and sells 10,000 shirts. The selling price per shirt is ₹ 500. Variable cost is ₹ 200 per
shirt and fixed operating cost is ₹ 25,00,000.
(a) Calculate operating leverage.
(b) If sales are up by 10%, then what is the impact on EBIT?

Question12 - Nov 12
Find Ltd. has estimated that for a new product, its operating break-even point is 2,000 units, if the item is sold
for ₹ 14 per unit. The cost accounting department has currently identified variable cost of ₹ 9 per unit.
Calculate the operating leverage for sales volume of ₹ 2,500 units and 3,000 units and their difference, if any?

Question 13 -
Ram Ltd. produces Mobile phones with a selling price per unit of ₹ 100. Fixed cost amount to ₹ 2,00,000. 5,000
units are produced and sold each year. Annual profits amount to ₹ 50,000. The company’s all equity-financed
assets are ₹ 5,00,000.
The company proposes to change its production process, adding ₹ 4,00,000 to investment and ₹ 50,000 to
fixed operational costs. The consequences of such a proposal are:
(i) Reduction in variable cost per unit by ₹ 10
(ii) Increase in output by 2,000 units
(iii) Reduction in selling price per unit to ₹ 95
Assuming a rate of interest on debt is 10%, examine the above proposal and advice whether or not the
company should make the change. Ignore taxation. Also measure the degree of operating leverage and overall
break-even-point.

Computation of Operating Leverage and Beta Analysis

Question14 - Nov 04, May 15
The following summarises the percentage changes in operating income, percentage changes in revenues, and
betas for four pharmaceutical firms.
Change in Operating
Firm Change in Revenue Income Beta
PQR Ltd. 27% 25% 1.00
RST Ltd. 25% 32% 1.15
TUV Ltd. 23% 36% 1.30
WXY Ltd. 21% 40% 1.40
Required:
(i) Calculate the degree of operating leverage for each of these firms. Comment also.
(ii) Use the operating leverage to explain why these firms have different beta.

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 Chapter 4 - Leverages

Computation of DOL, DFL and DCL

Question 15 - Nov 13
Calculate the degree of operating leverage, degree of financial leverage and the degree of combined leverage
for the following firms:
Particulars N S D
Production (in units) 17,500 6,700 31,800
Fixed cost (₹) 4,00,000 3,50,000 2,50,000
Interest on loan (₹) 1,25,000 75,000 Nil
Selling price per unit (₹) 85 130 37
Variable cost per unit (₹) 38.00 42.50 12.00

Question 16 - Nov 07
(i) Consider the following information for Omega Ltd.:
Particulars ₹ (In lakhs)
EBIT (Earnings before Interest and Tax) 15,750
Earnings before Tax (EBT) 7,000
Fixed Operating costs 1,575
Required:
Calculate percentage change in earnings per share, if sales increases by 5%.

Question 17 - Rtp May 2020

The following data have been extracted from the books of LM Ltd:
Sales - ₹ 100 lakhs
Interest Payable per annum - ₹ 10 lakhs
Operating leverage - 1.2
Combined leverage - 2.16
You are required to calculate:
(i) The financial leverage,
(ii) Fixed cost and
(iii)P/V ratio

Question 18 - Study Material, Nov 02

The data relating to two Companies are as given below:
Particulars Company A Company B
Equity Capital ₹ 6,00,000 ₹ 3,50,000
12% Debentures ₹ 4,00,000 ₹ 6,50,000
Output (units) per annum 60,000 15,000
Selling price/ unit ₹ 30 ₹ 250
Fixed Costs per annum ₹ 7,00,000 ₹ 14,00,000
Variable Cost per unit ₹ 10 ₹ 75
You are required to calculate the Operating leverage, Financial leverage and Combined leverage of two
Companies.

Question 19 - Study Material, May 97

A firm has sales of ₹ 75,00,000 variable cost of ₹ 42,00,000 and fixed cost of ₹ 6,00,000. It has a debt of ₹
45,00,000 at 9% and equity of ₹ 55,00,000.
(i) What is the firm’s ROI?
(ii) Does it have favourable financial leverage?
(iii) If the firm belongs to an industry whose asset turNover is 3, does it have a high or low assets leverage?
(iv) What are the operating, financial and combined leverages of the firm?
(v) If the sales drop to ₹ 50,00,000 what will be the new EBIT?
(vi) At what level the EBT of the firm will be equal to zero?

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Computation of DOL, DCL and DFL and Beta Analysis

Question 20 -
The following summarises the percentage change in E.P.S. percentage change in revenues & betas for four
companies in mobile business
Name of Companies Change in Revenues Change in EPS Beta
Nokia 10% 50% 1.40
Motorola 20% 80% 1.27
Samsung 25% 75% 1.18
Blackberry 30% 75% 1.10
(a) Calculate the Degree of Combined Leverage for each of these companies.
(b) If the Degree of operating leverage of these four companies is 2.5, 2, 2.25 & 1.2 respectively for Nokia,
Motorola, Samsung and Blackberry. Compute Degree of financial Leverage.
(c) Explain why these companies have different betas.

Question 21 - May 2017

You are given the following information of 5 firms of the same industry:
Name of the firm Change in revenue Change in operating Change in Earning
income per share
M 28% 26% 32%
N 27% 34% 26%
P 25% 38% 23%
Q 23% 43% 27%
R 25% 40% 28%
You are required to calculate:
(i) Degree of operating leverage and
(ii) Degree of combined leverage for all firms.

Computation of DOL, DFL, DCL with different fixed cost and Interest cost
Question 22 -
ABC Ltd. has its assets turNover ratio equal to 2. Its variable cost ratio is 60% of sales. Consider the following
three different capital structures and calculate the operating and financial leverages for the three different
fixed costs:-
(a) ₹ 4,000.
(b) ₹ 6,000.
(c) ₹ 8,000.

Capital Structure (In ₹)

Particulars A B C
Equity 60,000 40,000 20,000
10% Debt 20,000 40,000 60,000
Which combination has the highest & lowest DCL?

Computation of DOL, DFL, DCL – Risk Analysis

Question 23 - Mock Sept 2022
PI Limited has the following Balance Sheet as on March 31, 2020 and March 31, 2021:
Balance Sheet
Particulars March 31, 2020 March 31, 2021
Sources of Funds:
Shareholders’ Funds 87,500 87,500
Loan Funds 1,22,500 1,05,000
2,10,000 1,92,500

Applications of Funds:
Fixed Assets 87,500 1,05,000
Cash and bank 15,750 14,000
Receivables 49,000 38,500
Inventories 87,500 70,000

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 Chapter 4 - Leverages

Other Current Assets 35,000 35,000

Less: Current Liabilities (64,750) (70,000)
2,10,000 1,92,500
The Income Statement of the PI Ltd. for the year ended is as follows:
Particulars March 31, 2020 March 31, 2021
Sales 7,87,500 8,33,000
Less: Cost of Goods sold (7,30,100) (7,38,500)
Gross Profit 57,400 94,500
Less: Selling, General and Administrative expenses (38,500) (61,250)
Earnings before Interest and Tax (EBIT) 18,900 33,250
Less: Interest Expense (12,250) (10,500)
Earnings before Tax (EBT) 6,650 22,750
Less: Tax (1,995) (6,825)
Profits after Tax (PAT) 4,655 15,925
You are required to Calculate for the year 2020-21:
1. Inventory turNover ratio
2. Financial Leverage
3. Return on Capital Employed (after tax)

Practical Problems
Question 24 - Study Material, May 92
The following information is available in respect of two firms, P Ltd. and Q Ltd.:
(In ₹ Lacs)
Particulars P Ltd. Q Ltd.
Sales 500 1,000
Less: Variable Cost 200 300
Contribution 300 700
Less: Fixed Cost 150 400
EBIT 150 300
Less: 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.

Question 25 - Study Material, May 2019

The capital structure of ABC Ltd. consist of an ordinary share capital of ₹ 5,00,000 (equity shares of ₹ 100
each at par value) and ₹ 5,00,000 (10% debenture of ₹ 100 each). Sales increased from 50,000 units to 60,000
units, the selling price is ₹ 12 per unit, variable cost amounts to ₹ 8 per unit and fixed expenses amount to ₹
1,00,000. The income tax rate is assumed to be 50%.
You are required to calculate the following:
(a) The percentage increase in earnings per share;
(b) The degree of financial leverage at 50,000 units and 60,000 units;
(c) The degree of operating leverage at 50,000 units and 60,000 units;
(d) Comment on the behaviour E.P.S., operating and financial leverage in relation to increases in sales from
50,000 units to 60,000 units.

Question 26 - Nov 2019 Similar

A company had the following Balance Sheet as on March 31, 2006:
Liabilities and Equity ₹ (In Crores) Assets ₹ (In Crores)
Equity Share Capital (1 10 Fixed Assets (Net) 25
crore shares of ₹ 10 each)
Reserves and Surplus 2 Current Assets 15
20
15% Debentures 20

Current Liabilities 8
40 40

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 Chapter 4 - Leverages

The additional information given is as under:

Fixed Costs per annum (excluding interest) ₹ 8 crores
Variable operating costs ratio 65%
Total Assets turNover ratio 2.5
Income-tax rate 40%
Required: Calculate the following and comment:
(i) Earnings per share (iii) Financial Leverage (v) Current Ratio
(ii) Operating Leverage (iv) Combined Leverage

Computation of Leverage, EBIT for required EPS

Question 27 - Study Material
The Sale revenue of TM excellence Ltd. @ ₹20 Per unit of output is ₹20 lakhs and Contribution is ₹10 lakhs. At
the present level of output the DOL of the company is 2.5. The company does not have any Preference Shares.
The number of Equity Shares are 1 lakh. Applicable corporate Income Tax rate is 50% and the rate of interest
on Debt Capital is 16% p.a. What is the EPS (At sales revenue of ₹ 20 lakhs) and amount of Debt Capital of the
company if a 25% decline in Sales will wipe out EPS.

Question 28 - Nov 09
Z Limited is considering the installation of a new project costing ₹ 80,00,000. Expected annual sales revenue
from the project is ₹ 90,00,000 and its variable costs are 60 percent of sales. Expected annual fixed cost other
than interest is ₹ 10,00,000. Corporate tax rate is 30 percent. The company wants to arranges the funds
through issuing 4,00,000 equity shares of ₹ 10 each and 12 percent debentures of ₹ 40,00,000.
You are required to:
(i) Calculate the operating, financial and combined leverages and Earnings per Share (EPS).
(ii) Determine the likely level of EBIT, if EPS is (1) ₹ 4, (2) ₹ 2, (3) ₹ 0.

Computation of Leverage and effects of changes in Sales on EPS.

Question 29 - Study Material
PL Forgings Ltd. has the following balance sheet and income statement information:
Balance Sheet as on March 31st
Liabilities ₹ Assets ₹
Equity Capital (₹ 10 per share) 8,00,000 Net Fixed Assets 10,00,000
10% Debt 6,00,000 Current Assets 9,00,000
Retained Earnings 3,50,000
Current Liabilities 1,50,000
19,00,000 19,00,000
Income Statement for the year ending March 31
Particulars ₹
Sales 3,40,000
Operating expenses (including ₹ 60,000 depreciation) (1,20,000)
EBIT 2,20,000
Less: Interest (60,000)
Earnings before tax 1,60,000
Less: Taxes (56,000)
Net Earnings (EAT) 1,04,000
(a) Determine the degree of operating, financial and combined leverages at the current sales level, if all
operating expenses, other than depreciation, are variable costs.
(b) If total assets remain at the same level, but sales (i) increase by 20 percent and (ii) decrease by 20 per
cent, what will be the earnings per share at the new sales level?

Question 30 - Study Material

The following information is available for a concern for the year ended 31.3.2011.
Total Sales (Quantity) 100,000 units
Fixed Cost ₹ 12,60,000
Variable Cost 55% of sales

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 Chapter 4 - Leverages

Debt (@ 10%) ₹ 54,00,000

Equity (Face value of each share of ₹ 10) ₹ 50,00,000
Income tax rate 35%
Selling price per unit ₹ 80
You are required to find out –
1. Income Statement for the year ended 31.3.2011.
2. Operating and Financial Leverage
3. Company’s Return on Investment
4. How much of the Company’s sales have to come down so that earning of the company before tax
comes down to zero?

Question 31 - Study Material

XYZ Ltd. sells 2,000 units @ ₹ 10 per unit. The variable cost of production is ₹ 7 and fixed cost is ₹ 1,000. The
company raised the required funds by issue of 100, 10% debentures @ ₹ 100 each and 2,000 equity shares @ ₹
10 per share. The sales of XYZ Ltd. are expected to increase by 20%. Assume tax rate of company is 50%. You
are required to calculate the impact of increase in sales on earning per share.

Reverse Working with DCL

Question 32 - Nov 08, May 09
A company operates at a production level of 1,000 units. The contribution is ₹ 60 per unit, operating leverage is
6, and combined leverage is 24. If tax rate is 30%, what would be its earnings after tax?

Reverse Working with DFL - ROE and ROI with Interest Rate and Leverage.
Question 33 - May 07
ABC Limited has an average cost of debt at 10 percent and tax rate is 40 per cent. The financial leverage ratio
for the company is 0.60. Calculate Return on Equity (ROE) if its Return on Investment (ROI) is 20%.

Reverse Working with DCL- ROE and ROI

Question 34 - Study Material
The net sales of Carlton Limited is ₹ 30 crores. Earnings before interest and tax of the company as a
percentage of net sales are 12%. The capital employed comprises ₹ 10 crores of equity, ₹ 2 crores of 13%
Cumulative Preference Share Capital and 15% Debentures of ₹ 6 crores. Income-tax rate is 40%.
(i) Calculate the Return-on-equity for the company and indicate its segments due to the presence of
Preference Share Capital and Borrowing (Debentures).
(ii) Calculate the Operating Leverage of the Company given that combined leverage is 3.

Reverse Working with All Leverages

Question 35 - May 07, Nov 2017
The following details of RST Limited for the year ended 31st March, 2006 are given below:
Operating leverage 1.4 times
Combined leverage 2.8 times
Fixed cost (Excluding interest) ₹ 2.04 lakhs
Sales ₹ 30.00 lakhs
12% Debentures of ₹ 100 each ₹ 21.25 lakhs
Equity Share Capital of ₹ 10 each ₹ 17.00 lakhs
Income tax rate 30 per cent
Required:
(i) Calculate Financial leverage.
(ii) Calculate P/V ratio and Earning per Share (EPS).
(iii) If the company belongs to an industry, whose assets turNover is 1.5, does it have a high or low
assets leverage?
(iv) At what level of sales the Earning before Tax (EBT) of the company will be equal to zero?

Question 36 - Study Material, Nov 15

From the following prepare Income statement of Company A, B and C.
Company A B C
Financial Leverage 3:1 4:1 2:1

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 Chapter 4 - Leverages

Interest ₹ 200 ₹ 300 ₹ 1,000

Operating Leverage 4:1 5:1 3:1
Variable cost as a percentage to 2
sales 66 3
% 75% 50%
Income tax rate 45% 45% 45%

Question 37 - Nov 09
From the following data of Company A and Company B, Prepare their Income Statement
Particulars Company A Company B
Variable cost ₹ 56,000 60% of sales
Fixed Cost ₹ 20,000 -
Interest Expense ₹ 12,000 ₹ 9,000
Financial Leverage 05:01 -
Operating Leverage - 04:01
Income tax rate 30% 30%
Sales - ₹ 1,05,000

Miscellaneous Practical Problems

Question 38 -
Show the effect of Trading on equity on ROE of an entity from the following information:-
Particulars (₹ in 000's)
Total Assets 2000
Debt Equity Ratio
Case I 0:1
Case II 1:4
Case III 2:3
Tax rate – 35%, Rate of Interest – 15%, Return on Investment – 30%.

Question 39 - Study Material

X Ltd. details are as under:
Sales (@ 100 per unit) ₹ 24,00,000
Variable Cost 50%
Fixed cost ₹ 10,00,000
It has borrowed ₹ 10,00,000 @ 10% p.a. and its equity share capital share capital is ₹ 10,00,000 (₹ 100 each).
The company is in a tax bracket of 50%. Calculate:
(a) Operating Leverage
(b) Financial Leverage
(c) Combined Leverage
(d) Return on Equity
(e) If the sales increases by ₹ 6,00,000; what will the new EBIT?

Question 40 - May 13, Nov 2016

The following information related to XL company Ltd. For the year ended 31st March, 2013 are available to you:
Equity share capital of ₹ 10 each ₹ 25 lakh
11% Bonds of ₹ 1000 each ₹ 18.5 lakh
Sales ₹ 42 lakh
Fixed cost (Excluding Interest) ₹ 3.48 lakh
Financial leverage 1.39
Profit-Volume Ratio 25.55%
Income Tax Rate Applicable 35%
You are required to calculate:

(i) Operating Leverage;

(ii) Combined Leverage; and
(iii) Earnings Per Share.

Question 41 - May 2018

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The following information is related to YZ Company Ltd. for the year ended 31st March, 2020:
Equity share capital (of ₹ 10 each) ₹ 50 lakhs
12% Bonds of ₹ 1,000 each ₹ 37 lakhs
Sales ₹ 84 lakhs
Fixed cost (excluding interest) ₹ 6.96 lakhs
Financial leverage 1.49
Profit-volume Ratio 27.55%
Income Tax Applicable 40%
You are required to CALCULATE:
(i)Operating Leverage;
(ii)Combined leverage; and
(iii)Earnings per share.
Show calculations up-to two decimal points.

Question 42 - Rtp May 2021

Following information has been extracted from the accounts of newly incorporated Textyl Pvt. Ltd. for the
Financial Year 2020-21:
Sales ₨ 15,00,000
P/V ratio 70%
Operating Leverage 1.4 times
Financial Leverage 1.25 times
Using the concept of leverage, find out and verify in each case:
(i) The percentage change in taxable income if sales increase by 15%.
(ii)The percentage change in EBIT if sales decrease by 10%.
(iii)The percentage change in taxable income if EBIT increase by 15%.

Question 43 - Jan 2021

The information related to XYZ Company Ltd. for the year ended 31st March, 2020 are as follows:
Equity Share Capital of ₹ 100 each ₹ 50 Lakhs
12% Bonds of ₹ 1000 each ₹ 30 Lakhs
Sales ₹ 84 Lakhs
Fixed Cost (Excluding Interest) ₹ 7.5 Lakhs
Financial Leverage 1.39
Profit-Volume Ratio 25%
Market Price per Equity Share ₹ 200
Income Tax Rate Applicable 30%
You are required to compute the
following:
(i)Operating Leverage
(ii)Combined Leverage
(iii)Earnings per share
(iv)Earning Yield

Question 44 - Jan 2021

The data of SM Limited for the year ended 31st March 2020 is given below:
Fixed Cost (Excluding Interest) ₹ 2.25 Lakhs
Sales ₹ 45 Lakhs
Equity Share Capital of ₹ 10 each ₹ 38.50 Lakhs
12% Debentures of ₹ 500 each ₹ 20 Lakhs
Operating Leverage 1.2
Combined Leverage 4.8
Income tax rate 30%
Required:
(i)Calculate P/V ratio, Earning per share Financial leverage and Assets turNover.
(ii)If asset turNover of an industry is 1.1, then comment on adequacy of assets
turNover of SM Limited.
(iii)At what level of sales the Earnings before tax (EBT) of SM Limited will be
equal to zero?

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Question 45 - Dec 2021

Information of A Ltd. is given below:
· Earnings after tax: 5% on sales
· Income tax rate: 50%
· Degree of Operating Leverage: 4 times
· 10% debentures in capital structure: ₹ 3 lakhs
· Variable costs: ₹ 6 lakhs
Required:
(i) From the given data complete the following statement:
Sales XXXX
Less: Variable Costs ₹ 6,00,000
Contribution XXXX
Less: Fixed Cost XXXX
EBIT XXXX
Less: Interest Expenses XXXX
EBT XXXX
Less: Income tax XXXX
EAT XXXX
(ii) Calculate the Financial Leverage and Combined Leverage.
(iii)Calculate the percentage change in earning per share, if sales increased by 5%.

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