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No.4 for CAICWA & MECICEC MASTER MINDS }
6. LEVERAGES
CONCEPT WISE ANALYSIS OF PAST EXAM PAPERS OF IPCC
Mis
Nas
M-16
N16
No.| Model Name
M09
N-09
M-10
N-10
Mit
Neat
M-12
Netz
M-13
N-13
Mia
N-14
CALCULATION OF
DOL, DFL, DCL
CALCULATION OF EPS | -|-{-|-|-|-|-|-|-|-|-|-|-|-|-|-
CALCULATION OF
ROE, RO!
income statement |-|@{-|-|-|-|-|-|-|-|-|-|-[s]-]-
‘COMPREHENSIVE
PROBLEMS
MISCELLENEOUS || | eee |e ||| ee
{intense in EBLT.]
EBT. I
crease in sale
Sales |
ene Sie eens) ea ede
= % Change in €.8.1.7.
1. Operating Leverage % Changs in sales |
= Contribution
2. Degree of Operating Leverage ae
Increase in E.P.S./E.P.S
3. Financial Leverage = -
Increase inE.B..T/E.B.1T.
= seer _EBIT
4, Degree of Financial Leverage = = Ag ea narcal Charge” EBT
5. Combined leverage
124; Z Limited is considering the installation of a new project costing Rs.80,00,000.
Expected annual sales revenue from the project is Rs.90,00,000 and its variable costs are 60
percent of sales. Expected annual fixed cost other than interest is Rs. 10,00,000. Corporate tax
rate is 30 percent. The company wants to arrange the funds through issuing 4,00,000 equity
shares of Rs.10 each and 12 percent debentures of Rs.40,00,000. (PM)
You are required to:
a) Calculate the operating, financial and combined leverages and Earnings per Share (EPS).
b) Determine the likely level of EBIT, if EPS is (1) Rs. 4, (2) Rs. 2, (3) Rs. 0. (Nov-09)
(Ans.: a) 1.384, 1.226, 1.896, 3.71; b) 1)Re, 27,65,714; 2) Rs. 16,22,887; 3) Rs. 4,80,000)
Note:
P25: (PRINTED SOLUTION AVAILABLE) Delta Ltd. currently has an equity share capital of
Rs.10,00,000 Equity share of Rs.10 each. The company is going through a major expansion
plan requiring to raise funds to the tune of Rs. 6,00,000. To finance the expansion the
management has following plans: (pm)
Plant: Issue 60,000 Equity shares of Rs.10 each
Plan-ll : Issued 40,000 Equity shares of Rs.10 each and the balance through longterm
borrowing at 12% interest p.a.
Plan-lll_ Issue 30,000 Equity shares of Rs.10 each and 3,000 Rs.100, 9% Debentures.
Plan-lV: Issue 30,000 Equity shares of Rs.10 each and the balance through 6%
preference Shares.
IPCC_37e_F.M.(Problems)_Leverages 46 No.4 for CAICWA & MECICEC MASTER MINDS }
The EBIT of the company is expected to be Rs.4,00,000 p.a. assume corporate tax rate of
40%.
Required:
a) Calculate EPS in each of the above plans
b) Ascertain the degree of financial leverage in each plan.
(Ans.: a) 11.50; I~ 1.61; I = 4.72; MW = 1.71; b)1~ 1.00; t= 1.06; = 1.07; IV ~ 1.08)
Note:
1.26: (PRINTED SOLUTION AVAILABLE) Saraju Ltd, produces electronic components with
a selling price per unit of Rs.100. Fixed cost amounts to Rs.2,00,000. 5,000 units are
produced and sold each year. Annual profits amount to Rs, 50,000. The company's all equity-
financed assets are Rs. 5,00,000. The company proposes to change its production process,
adding Rs.4,00,000 to investment and Rs.50,000 to fixed operational costs. The
‘consequences of such proposal are:
a) Reduction in variable cost per unit by Rs. 10.
b) Increase in output by 2,000 units.
¢) Reduction in S.P-/unit to 95.
‘Assuming an average cost of capital 10%, examine the above proposal and advise whether or
not the company should make the change. Also measure degree of operating leverage and
break-even point. (Ans.: tis advisable for the comsahy to implement the proposed changes)
(Solve Problem No. Replat Problems as rework)
Note:
127; (PRINTED SOLUTION syanaei goog details of RST Limited for the year
ended 31March, 2013 are given below: (PM) (M07)
Operating leverage 14
Combined leverage 28
Fixed Cost (Excluding interest) Rs. 2.04 lakhs
Sales Rs, 30.00 lakhs
12% Debentures of Rs. 100 each Rs, 21.26 lakhs
Equity Share Capital of Rs. 10 each Rs. 17.00 lakhs
Income tax rate 30 per cent
Required:
a) Calculate financial leverage
b) Calculate piv ratio and earning per share (EPS)
¢) Ifthe company belongs to an industry, whose assets turnover is 1.5, does it have a high or
low assets leverage?
d) At what level of sales the earning before tax (EBT) of the company will be equal to zero?
(Ans.: a) 2; b) 23.8%; 1.08; ¢) low asset turnover; d) 19.29 lakhs)
(Solve Problem No. 8, 9 of Assignment Problems as rework)
Note:
IPCC_37e_F.M.(Problems) Leverages \[Link]
8851 25025/26 [Link]
Pr28:The following summarises the percentage changes in operating income, percentage
changes in revenues, and betas for four pharmaceutical firms
Firm Ltd Change in Revenue | Change in operating Income Beta
PAR Ltd 27% 25% 1.00
RST Ltd, 25% 32% 1.15
TUV Ltd, 23% 36% 4.30
TUV 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. (PM M-15)
(Ans:() 0.9259,1.26,1.5652,1.9048)
Note:
[Link] capital structure of JCPL Itd is as follows.
Rs.
Equity Share Capital of Rs 10/- each 8,00,000
8% Preference Share capital of Rs.10/- each 6,25,000
10% Debentures of Rs.100/- each 4,00,000
78,25,000
Additional Information:
Profit after tax (tax rate 30%) LS Rs.1,82,000
Operating expenses (including sernone ise 000) being 1.50 times of EBIT
Equity Share dividend paid 15%
Market Price per equity share Rs.20/5
Required to calculate:
i) Operating and Financial Leverage
il) Cover for the preference and Equity share of dividends
The earning yield and price earnings ratio.
iv) The net fund flow. (Pm)
(Ans:(91.30times, 1.15times (i) 3.64times ,1.10 times (i) 8.25% (iv) Rs.1,02,000)
(Solve Problem No. 10, 11 of Assignment Problems as rework)
Note:
sATEGORY PROBLEMS
28,8,8,9,10,11,12,17,19,21,23,26,25,26,28,29
(APPLICABLE FOR WEEKEND EXAMS ONLY BUT NOT FOR ANY OTHER EXAMS)
PST tay
Prt: A firm has Sales of Rs.40 lakhs; Variable cost of Rs.25 lakhs; Fixed cost of Rs.6 lakhs;
10% debt of Rs.30 lakhs; and Equity Capital of Rs.45 lakhs. (PM)
Required:
Caloulate operating and financial leverage. (Ans.: 1.87 & 1.50)
IPCC_37e_F.M.(Problems)_Leverages 48 No.4 for CAICWA & MECICEC MASTER MINDS }
PLZ; The following data relate to RT Ltd (PM)
Rs
Earnings before interest and tax (EBIT) 70,00,000
Fixed cost 20,00,000
Earnings Before Tax (EBT) 8,00,000
Required: Calculate combined leverage. (Ans.: 3.75 times)
Pr.3 The data relating to two Companies are as given below: (SM) (PM)
Company A Company B
Equity Capital Rs. 6,00,000 Rs. 3,50,000
12% Debentures Rs. 4,00,000 Rs. 6,50,000
Output (units) per annum 60,000 15,000
Selling price/unit Rs. 30 Rs, 250
Fixed Costs per annum Rs. 7,00,000 Rs, 14,00,000
Variable cost per unit Rs. 10 Rs. 75
You are required to calculate the Operating leverage, financial leverage and combined
leverage of the two companies. (N02 - 4m)
(Ans.: Company A is 2.4, 1.11, 2.664 & Company B Is 2.14, 1.07, 2.568)
P14: Calculate the degree of operating leverage, degree of financial leverage and the degree
of combined leverage for the following firms and interpret the resutts (PM)
P Qe R
Output (units) 2,50,000 1,25,000 7,50,000
Fixed Cost (Rs.) 5,00,000, S 2,50,000 40,00,000
Unit Variable Cost (Rs.) SS 2 7.50
Unit Selling Price (Rs.) 7 10.0
Interest Expense (Rs.) 10 25,000 -
(Ans.: For P is Aggressive Polley, Q is Modbate Polioy & R is Moderate Polley with no financial leverage)
PLS: From the following prepare Income Statement of Company A, B and C. Briefly comment
‘on each company's performance:
Company A B c
DOFL a4 a4 24
Interest Rs. 200 Rs. 300 Rs, 1000
DOL 44 54 34
Variable Cost as % to sales 66 75% 50%
Income-tax Rate 45% 45% 45%
(Ans.: Sales for Company A Rs. 3,600 & Company B Rs. 8,000 & Company C Rs. 12,000)
PLS: You are given two financial plans of a company which has two financial situations. The
detailed information are as under: (PM)
Installed capacity 10,000 units
Actual production and sales 60% of installed capacity
Selling price per unit Rs.30
Variable cost per unit Rs.20
Fixed cost:
Situation ‘A’ = Rs, 20,000
Situation ‘B' = Rs. 25,000
IPCC_37e_F.M.(Problems) Leverages 8851 25025/26
Capital structure of the company is as follows:
Financial Plans
xY xM
Rs. Rs.
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,
(Ans.; Financial Plan XY, Situation A is 1.5 & 1.14, Situation B is 1.71 & 1.16 & Financial Plan XM, Situation
Ais 1.5 & 1.03, Situation Bis 1.71 & 1.04)
PLZ: The balance sheet of Well Estimated Company is as follows:
Ui S Rs. Assets Rs.
Equity share capital 60,000 | Fixed Assets 7,50,000
Retained Earnings 20,000 | Current Assets 50,000
10% Long term debt 80,000
Current Liabilities 40,000,
2,00,000 2,00,000
The company's Total Assets turnover ratio is 3. Its Fixed operating costs are Rs.1,00,000 and
its Variable operating cost ratio is 40%. The income = tax rate is 50%. Calculate for the
‘Company the different types of leverages given that t value of the share is Rs.10,
DOL Is 1.38, DOFL is 1.03, DOCL Is 1.42)
P18: The well Established Company's most referee sheet is as follows’
Liabilities Agent ‘Assets ‘Amount
Equity capital (Rs. 10 per share) $60,000 | Net fixed assets Rs.1,50,000
10% Long-term debt 80,000 | Current assets 50,000
Retained earnings 20,000
Current liabilities, 40,000
2,00,000 2,00,000
The company’s total asset turnover ratio is 3, its fixed operating costs are Rs. 1,00,000 and the
variable costs ratio is 40%. The income tax rate is 35 percent.
a) Calculate all the three types of leverages
b) Determine the likely level of EBIT if EPS is (i) Re 1, (ii) Rs 3, and (ill) Zero.
(Ans.; a, DOL is 1.38, DOFL is 1.031, DOCL is 1.42, b. () Rs. 17,230.76 (i) Rs. 36,692 (it) Rs. 8,000)
P19: Alpha Ltd. has furnished the following Balance Sheet as on March 31, 2011 (pm)
Liabilities Rs. ‘Assets Rs.
Equity Share Capital (7,00,000 10,00,000 | Fixed Assets '30,00,000
equity shares of Rs. 10 each) Current Assets 18,00,000
General Reserve 2,00,000
15% Debentures 28,00,000
Current Liabilities 8,00,000
48,00,000 48,00,000
Additional Information:
4. Annual Fixed Cost other than Interest 28,00,000
2. Variable Cost Ratio 60%
3. Total Assets Turnover Ratio 25
4. Tax Rate 30%
IPCC_37e_F.M.(Problems)_Leverages 50 No.4 for CAICWA & MECICEC MASTER MINDS }
You are required to calculate:
i) Earnings per Share (EPS), and (n-t1)
ii) Combined Leverage (Ans.: (Rs. 11.06 (i) 3.04)
P10; A firm has sales of Rs.75,00,000 variable cost of Rs.42,00,000 and fixed cost of Rs.
6,00,000. It has a debt of Rs.45,00,000 at 9% and equity of Rs.55,00,000.
a) What is the firm's ROI?
b) Does it have favourable financial leverage?
¢) Ifthe firm belongs to an industry whose asset turnover is 3, does it have a high or low
asset leverage?
d) What are the operating, financial and combined leverages of the firm?
e) Ifthe sales drop to Rs.50,00,000, what will be the new EBIT?
f) At what level the EBT of the firm will be equal to zero?
(Ans.: a. 27% b. is favorable financial leverage c. The firm’s asset turnover ratio is less than the Industry
ratio, d. 1.222, 1.1764, 1.438, e. Rs, 18,00,290, f. Sales Rs. 22,84,091)
Pr.14:The Net sales of A Ltd. is Rs.30 crores. Earnings before interest and tax of the company
a8 a percentage of net sales are 12%. The capital employed comprises Rs.10 crores of equity,
Rs.2 crores of 13% Cumulative Preference Share Capital and 15% Debentures of Rs. 6
‘orores. Income-tax rate is 40%.
i) Calculate the Return-on-equity for the company an
Presence of Preference Share Capital and Borrowi
indicate its segments due to the
entures).
that the combined leverage is 3
(PM) (Ans:13.60%)
ii) Calculate the operating leverage of the company
gS
|ATEGORY ASSIGNMENT PROBLEMS — 14,5,6,9,10,11
‘APPLICABLE FOR WEEKEND EXAMS ONLY BUT NOT FOR ANY OTHER EXAMS)
Verified by: M.P. Raju Sir
Executed by: Sai Ram Sir
THE END
IPCC_37e_F.M.(Problems)_Leverages 51
