Ch - 1 Financial Decisions - Leverages

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 SUPER STAR QUESTIONS

Q8. Practical Q4
Q10. Practical Q10
Q13. Practical Q8
Q26. PY Nov 19
Q27. PY Jan 21

Q11. Practical Q6
Q14. Practical Q9
Q16. Additional Question
Q40. RTP Nov 22
Q24. PY Dec 21

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 LEVERAGE
combined
Financial DCL
DFL Operational occurs due to
occurs due to IDOL both fired
finedfinancial occursdue to financial cost
cost
fired operational and operational
cost eg rent
eg Interest cost
depreciation salary
knample
1 With fined cost
ve ve
Before
Sale 10,0002 20,000 5,000
H Variable Cost 13,0001 16,0007 1,500

contribution 7,000 14,000 3,500

It cost 14,0007
fined rent 14,0001 14,0001
eg salary
E BIT 3,000 10,000 500

Um
12 without fined cost

Sale 10,000 2times 20,000

Variable cost 13,000 16,0001

contribution 7,000 14,000

it cost
fined 10 o

EB IT 7,000 14,000

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 DOL Conti
EBIT
i 11 DOL 7,000 2.33 times
3,000

3000 2.33 3 000 10,000

increased 2.33times
by
4 Doc I time
Eff
Whenfined cost is zero DOL would always be't

13 cost
high fined
sale 101000 201000
Variable cost 3,000 6,0001

contribution 7,000 14,000

it cost
fined 6,000 61000

EB IT 1,000 8,000

DOL 7,000 F times

1,000

conclusion cost Doc

fined
1 4,000 2.33 times
2 6,000 7 times

cost increases Dol increases Hence

If fined leverage more risk is more

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 Summary
companies like
PVR Air India
cost like rent
having
interest
high fined will
have more leverage
salary
Although there is no sale during
coccid still all such
fined cost
remain constant Hence company
is high risk As an investor
taking
we should prefer to invest in a
low fined cost
company
well
having love
as as
leverage

case
study
Air India 1,000 aircrafts
Debt 10,000 Cr Adverse impact
ofleverage
ROI 181 ROI 6 f
Int 101 Fut 101
Profit St loss 141

Interpretation of leverage
DFL S5 Doc 5

Debt stil
Id
fined cost 545
Int Rent Salary
Risk Ed Risk
5

Benefit Ed Profit 5T
so
Profit

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 Lets understand Doc DFL DCL with
the help of following example
FY 23 F 24
change
Sale 20,000 24,000
Variable cost 61000 17,2007 20.1
13011
contribution 14,000 16,800 201
it cost
fined 4,000 9,000 of

E BIT 10,000 12,800 281

1 I Interest 15,000 151000 of

EBT 5,000 7,800 561

Answer

DOL Contribution Change in EBI

EBIT YES i change in Sales
14,000 281
10,000 207
1.4 1.4

EB17 change in EBT

DFL By
DEE change in EBM
10,000 561
5,000 281
2 2
DCL DOLX DFL
1.4 x 2
2.8
DCL Conti taint
H EBT IEE Dry i change in Sales
I change in EBT
tchangeinEBT
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 DCL Conti DCC 1 changein EBT
Fi EBT FL 1 changein Sales
56
88
2.8 2 8

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 Self Assessment Questions

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 CHAPTER-1
FINANCING DECISIONS – LEVERAGES
Q.4 The following information is related to Yizi Company Ltd. for the year ended 31st March, 2021:

Equity shares 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.
Ans: Computation of profit after Tax (PAT)
Particulars (₹)
Sales 84,00,000
Contribution (Sales x P/V) ratio 23,14,200
Less: Fixed cost (excluding interest) (6,96,000)
EBIT (Earning before interest and tax) 16,18,200
Less: Interest on debentures (12% x ₹37 lakh) 4,44,000
Less: Other fixed interest (balancing figure) (88,160)*
EBT (Earnings before tax) 10,86,040
Less: Tax @ 40% 4,34,416
PAT(Profit after tax) 6,51,624
(i) Operating Leverage:
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 23,14,200
= = =1.43
𝐸𝐵𝐼𝑇 16,18,200

(ii) Combined Leverage:

=Operating Leverage x Financial Leverage
= 1.43 x 1.49 = 2.13
OR,
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝐸𝐵𝐼𝑇
Combined Leverage = x
𝐸𝐵𝐼𝑇 𝐸𝐵𝑇

𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 ₹23,14,200
Combined Leverage = x = 2.13
𝐸𝐵𝑇 ₹10,86,040

𝐸𝐵𝐼𝑇 16,18,200
Financial Leverage = = =1.49
𝐸𝐵𝑇 𝐸𝐵𝑇

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 16,18,200
So, EBT = = ₹ 10, 86,040
1.49
Accordingly, other fixed interest = ₹ 16,18,200 − ₹ 10,86,040 − ₹ 4,44,000
= 88,160
(iii) Earnings per share (EPS):]

𝑃𝐴𝑇 ₹6,51,624
= = = ₹1.30
𝑁𝑜. 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 5,00,000 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒𝑠

Q.5
Following are the selected financial information of A Ltd. And B Ltd. For the current Financial
Year.

Particulars A Ltd. B. Ltd.

Variable Cost Ratio 60% 50%

₹20,000 ₹1,00,000
Interest
5 2
Operating Leverage

Financial Leverage 3 2

Tax Rate 30% 30%

You are required to FIND out:
(i) EBIT
(ii) Sales
(iii) Fixed Cost
(iv) Identify the company which is better placed with reasons based on leverages.

Ans: Company A
𝐸𝐵𝐼𝑇
(i) Financial Leverage = 𝐸𝐵𝑇 𝑖.𝑒.𝐸𝐵𝐼𝑇−𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡

𝐸𝐵𝐼𝑇
So, 3 = 𝐸𝐵𝐼𝑇− ₹20,000

Or, 3 (EBIT – 20,000) = EBIT

Or, 2 EBIT = 60,000
Or, EBIT = 30,000

𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
(ii) Operating Leverage = Or, 5 =
𝐸𝐵𝐼𝑇 ₹30,000
Or, Contribution = ₹1,50,000

𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 ₹1,50,000
Sales = 𝑃/𝑉 𝑅𝑎𝑡𝑖𝑜 (1−𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑟𝑎𝑡𝑖𝑜) = = ₹3,75,000
40%

(iii) Fixed Cost = Contribution –EBIT

= ₹ 1,50,000 − 30,000
Or, Fixed Cost = ₹ 1,20,000

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 Company B
𝐸𝐵𝐼𝑇
(i) Financial Leverage =
𝐸𝐵𝑇 𝑖.𝑒.𝐸𝐵𝐼𝑇−𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡

𝐸𝐵𝐼𝑇
So, 2 = 𝐸𝐵𝐼𝑇− ₹1,00,000

Or, 2 (EBIT – ₹ 1,00,000) = EBIT

Or, 2 EBIT - ₹ 2,00,000 = EBIT
Or, EBIT = ₹2,00,000

𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
(ii ) Operating Leverage = 𝐸𝐵𝐼𝑇

𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
Or, 2 = ₹2,00,000

Or, Contribution = ₹4,00,000

𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 ₹ 4,00,000
Sales = 𝑃/𝑉 𝑅𝑎𝑡𝑖𝑜 (1−𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑟𝑎𝑡𝑖𝑜) = = ₹8,00,000
50%

(iii) Fixed Cost = Contribution –EBIT

= ₹ 4,00,000 − ₹2,00,000
Or, Fixed Cost = ₹ 2,00,000
Company A Company B
(₹) (₹)
Sales 3,75,000 8,00,000
Less: 2,25,000 4,00,000
Contribution 1,50,000 4,00,000
Less: Fixed Cost 1,20,000 2,00,000
Earnings before interest and tax (EBIT) 30,000 2,00,000
Less: Interest 20,000 1,00,000
Interest before tax (EBT) 10,000 1,00,000
Less: Tax @ 30% 3,000 30,000
Earnings after tax (EAT)
7,000 70,000

Comment based on Leverage

Comment based on leverage – Company B is better than company A of the following reasons:
 Capacity of Company B to meet interest liability is better than that of companies A (from
EBIT/interest ratio)

₹30,000 ₹20,000
[𝐴 = = 1.5 B = = 2]
₹20,000 ₹1,00,000
 Company B has the least financial risk as the total risk (business and financial) of
company B is lower (combined leverage of Company A-15 and Company B-4)

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Q.13 CALCULATE the operating leverage, financial leverage and combined leverage from the
following data under Situation I and II and Financial Plan A and B:
Installed capacity 4,000 units
Actual production and sales 75% of the capacity
Selling Price ₹30 per unit
Variable Cost ₹15 per unit

Fixed Cost:
Under Situation I 15,000
Under Situation II 20,000

Capital Structure:
Financial Plan
A (₹) B(₹)
Equity 10,000 15,000
Debt (ROI 20%) 10,000 5,000
20,000 20,000

Ans: (i) Operating Leverage (OL)

Situation-I Situation-II
(₹) (₹)
Sales (3000 units @ 30 percent unit) 90,000 90,000
45,000 45,000
Less: Variable Cost (@15 percent unit)

Contribution (C) 45,000 45,000

15,000 20,000
Less: Fixed Cost
30,000 25,000
EBIT

𝐶
Operating Leverage (OL) =
𝐸𝐵𝐼𝑇
45,000 45,000
= =
30,000 30,000
=1.5 =1.8

(ii) Financial Leverage (FL)

A (₹) B (₹)
Situation I
EBIT
30,000 30,000
Less: Interest on debt 2,000 1,000
EBT 28,000 28,000

𝐸𝐵𝐼𝑇 30,000 30,000

Financial Leverage (FL) = = =
𝐸𝐵𝑇 28,000 29,000
=1.07 =1.034
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 A (₹) B (₹)
Situation-II

EBIT 25,000 25,000

Less: Interest on debt 2,000 1,000
EBT 23,000 24,000

𝐸𝐵𝐼𝑇
Financial Leverage (FL) =
𝐸𝐵𝑇 25,000 25,000
= =
23,000 24,000
=1.09 =1.04
(iii) Combined Leverage (CL)
A B
Situation-I
CL =FL x OL 1.5x1.07=1.61 1.5x1.03=1.55
Situation-II
CL x FL x OL 1.8x1.09=1.96 1.8x1.04=1.872

Q.18 From the following information prepare income statement of Company A and B “

Particulars Company A Company B

Margin of safety 0.20 0.25
Interest 3,000 2,000
Profit volume ratio 25% 33.33$
Financial leverage 4 3
Tax Rate 45% 45%

Ans: Income Statement

Particulars Company A Company B
(₹) (₹)
Sales 80,000 36,000
Less: Variable Cost 60,000 24,000
Contribution 20,000 12,000
Less: Fixed Cost 16,000 9,000
EBIT 4,000 3,000
Less: Interest 3,000 2,000
EBT 1,000 1,000
450 450
Tax (45%)
550 550
EAT
Workings:
(i) Company A
Financial Leverage = EBIT/(EBIT-Interest)
4 = EBIT/(EBIT- ₹3,000)
4EBIT- ₹ 12,000 = EBIT
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 3EBIT = ₹ 12,000
EBIT = ₹ 4,000
Company B
Financial Leverage = EBIT/(EBIT- interest)
3 = EBIT/(EBIT - ₹ 2,000 )
3EBIT -₹6000 = EBIT
2EBIT = ₹ 6,000
EBIT = ₹ 3,000
(ii) Company A
Operating Leverage = 1/Margin of Safety
= 1/0.20 = 5
Operating Leverage = Contribution/EBIT
5 = Contribution / ₹ 4,000
Contribution = ₹ 20,000
Company B
Operating Leverage = 1/Margin of Safety
=1/0.25 =4
Operating Leverage = Contribution/EBIT
Operating Leverage = Contribution/EBIT
4 = Contribution / ₹ 3,000
Contribution = ₹ 12,000
(iii) Company A
Profit Volume Ratio = 25% (Given)
Profit Volume Ratio = Contribution/Sales x100
25% =₹20,000/Sales
Sales = ₹ 20,000/25%
Sales = ₹ 80,000
Company B
Profit Volume Ratio = 33.33%
Therefore, Sales = ₹ 12,000/33.33%
Sales = ₹ 36,000

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 1see
- 4

Ch 6
Leverage
0008

1.1 Introduction
• A firm can finance its operations through common and preference shares, with retained earnings, or with
debt. Usually a firm uses a combination of these financing instruments.
• Capital structure refers to a firm’s debt-to-equity ratio, which provides insight into how risky a company is
Capital structure decisions by firms will have an effect on the expected profitability of the firm, the risks faced
by debt holders and shareholders, the probability of failure, the cost of capital and the market value of the
firm.

1.1.1 Business Risk and Financial Risk

• Risk facing the common shareholders is of two types, namely business risk and financial risk. Therefore, the
risk faced by common shareholders is a function of these two risks, i.e. Business Risk, Financial Risk
a) Business Risk : It refers to the risk associated with the firm’s operations. It is the uncertainty about the
future operating income (EBIT), i.e. how well can the operating incomes be predicted ?
Business risk can be measured by the standard deviation of the Basic Earning Power ratio.
Low Risk

0 E (EBIT) (EBIT)

b) Financial Risk : It refers to the additional risk placed on the firm’s shareholders as a result of debt use i.e. the
additional risk a shareholder bears when a company uses debt in addition to equity financing. Companies that
issue more debt instruments would have higher financial risk than companies financed mostly or entirely by
equity.
Risk Business Risk Financial Risk
a) Meaning It is associated with firm’s operation’s, and It is the additional risk placed on Equity
refers to the uncertainty about future Net Shareholders due to theuse of Debt Funds.
Operating Income (EBIT)
b) Measurement It can be measured by the standard deviation It can be measured using ratios like
of the BasicEarning power, i.e. ROCE. leverage multiplier, Debt to assets,etc.
c) Linked to Economic Climate. Use of Debt Funds.

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See

Risk Business Risk Financial Risk

d) Reduction Every firm would be susceptible to business A firm which is entirely financed by equity
risk due to changes in the overall economic (i.e. anunlevered Firm) will have almost no
climate & business operating conditions. financial risk.

1.2
I Debt versus Equity Financing
• Financing a business through borrowing is cheaper than using equity. This is because :
a) Lenders require a lower rate of return than ordinary shareholders. Debt financial securities present a
lower risk than shares for the finance providers because they have prior claims on annual income and
liquidation.
b) A profitable business effectively pays less for debt capital than equity for another reason: the debt
interest can be offset against pre-tax profits before the calculation of the corporate tax, thus reducing
the tax paid.
c) Issuing and transaction costs associated with raising and servicing debt are generally less than for
ordinary shares.
• These are some benefits from financing a firm with debt. Still firms tend to avoid very high gearing levels.
• One reason is financial distress risk. This could be induced by the requirement to pay interest regardless of
the cash flow of the business. If the firm goes through a rough period in its business activities it may have
trouble paying its bondholders, bankers and other creditors their entitlement.
• The relationship between Expected return (Earnings per share) and the level of gearing can be represented as :

Level of gearing (%) Gearing (%)

Relationship between leverage and risk

• Leverage can occur in either the operating or financing portions of the income statement.
• The effect of leverage is to magnify the effects of changes in sales volume on earnings. Let’s now discuss in
detail Operating, Financing and Combined Leverages.
1.3 MEANING AND TYPES OF LEVERAGE

1.3.1 Meaning of Leverage

• Leverage refers to the ability of a firm in employing long term funds having a fixed cost, to enhance returns to
the owners. In other words, leverage is the amount of debt that a firm uses to finance its assets. A firm with a
lot of debt in its capital structure is said to be highly levered. A firm with no debt is said to be unlevered.
• The term Leverage in general refers to a relationship between two interrelated variables. In financial analysis
it represents the influence of one financial variable over some other related financial variable. These financial
variables may be costs, output, sales revenue, Earnings Before Interest and Tax (EBIT), Earning per share
(EPS) etc.
1.3.2 Types of Leverage
I
There are three commonly used measures of leverage in financial analysis. These are :
a) Operating Leverage
b) Financial Leverage
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 1- 6

c) Combined Leverage

1.3.3 Chart Showing Operating Leverage, Financial Leverage and Combined leverage

Profitability Statement

Sales xxx

Less: Variable Cost (xxx)

Operating
Contribution xxx
Leverage Combined
Less: Fixed Cost (xxx) Leverage
Operating Profit/ EBIT xxx 
Financial
Less: Interest (xxx) Leverage

Earnings Before Tax (EBT) xxx

Less: Tax (xxx)

Profit After Tax (PAT) xxx

Less: Pref. Dividend (if any) (xxx)

Net Earnings available to equity xxx

shareholders/ PAT xxx

No. Equity shares (N) xxx

Earnings per Share (EPS) = (PAT ÷ N) xxx

1.3.4 Operating Leverage

• Operating leverage (OL) may be defined as the employment of an asset with a fixed cost in the hope that
sufficient revenue will be generated to cover all the fixed and variable costs.
• The use of assets for which a company pays a fixed cost is called operating leverage. With fixed costs the
percentage change in profits accompanying a change in volume is greater than the percentage change in
volume. The higher the turnover of operating assets, the greater will be the revenue in relation to the fixed
charge on those assets.

Profitability

High Operating leverage

EBITL EBITH :

Operating leverage is a function of three factors :

i) Amount of fixed cost
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 See
1- 7

ii) Variable contribution margin and

iii) Volume of sales.
Contrubution (C)
Operating Leverage (OL) = A

E Earnings before interest and tax (EBIT) E

Where, Contribution (C) = Sales – Variable cost

EBIT = Sales – Variable cost – Fixed cost

1.3.5 Break-Even Analysis and Leverage

• Break-even analysis is a generally used method to study the Cost Volume Profit analysis. This technique can
be explained in two ways :
a) It is concerned with computing the break-even point. At this point of production level and sales there
will be no profit and loss i.e. total cost is equal to total sales revenue.
b) This technique is used to determine the possible profit/loss at any given level of production or sales.

• There is a relationship between leverage and Break-even point. Both are used for profit planning. In brief the
relationship between leverage, break-even point and fixed cost as under.

Leverage Break-even point

1. Firm with leverage 1. Higher Break-even point
2. Firm with no leverage 2. Lower Break-even point
Fixed cost Operating leverage
1. High fixed cost 1. High degree of operating leverage
2. Lower fixed cost 2. Lower degree of operating leverage

1.3.6 Degree of Operating Leverage (DOL)

In
• The operating leverage may also be defined as “the firm’s ability to use fixed operating cost to magnify the
effects of changes in sales on its earnings before interest and taxes.”
Percentage change in EBIT
Degree of Operating Leverage (DOL) = A

Percentage change in Sales E

OR
∆ EBIT
EBIT
=
∆ Sales
A E

Salse
E

• ∆ EBIT means changes in EBIT ∆ Sales means changes in Sales

• When DOL is more than one (1), operating leverage exists. More is the DOL higher is operating leverage.
• A positive DOL/OL means that the firm is operating at higher level than the break-even level and both sales
and EBIT moves in the same direction. In case of negative DOL/OL firm operates at lower than the break-even
and EBIT is negative.

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Positive and Negative Operating Leverage

Sr. No. Situation Result

1 No Fixed Cost No operating leverage
2. Higher Fixed cost Higher Break-even point
3. Higher than Break-even level Positive operating leverage
4. Lower than Break-even level Negative operating leverage

1.3.7 Financial Leverage

• Financial leverage (FL) maybe defined as ‘the use of funds with a fixed cost in order to increase earnings per
share. In other words, it is the use of company funds on which it pays a limited return.
• Financial leverage involves the use of funds obtained at a fixed cost in the hope of increasing the return to
common stockholders.
Where, EBIT = Sales – Variable cost – Fixed cost
EBT = EBIT – Interest

1.3.8 Degree of Financial Leverage (DFL)

A
• Degree of financial leverage is the ratio of the percentage increase in earnings per share (EPS) to the
percentage increase in earnings before interest and taxes (EBIT).
• Financial Leverage (FL) is also defined as ‘the ability of a firm to use fixed financial charges to magnify the
effect of changes in EBIT on EPS’.
Percentage change in Earning per share (EPS)
Degree of Financial Leverage (DFL) = Percentage change in Earnings before Interest & Tax (EBIT)
A

E
E

OR

∆ EPS
EPS
=
∆ EBIT
A E

EBIT
E

• ∆ EPS means change in EPS and ∆ EBIT means change in EBIT.

By CA Swapnil Patni Buy Books & PD from www.swapnilpatni.com 81

 1b
- 9

• When DFL is more than one (1), financial leverage exists. More is DFL higher is financial leverage.
• A positive DFL/ FL means firm is operating at a level higher than break-even point and EBIT and EPS moves
in the same direction. Negative DFL/ FL indicates the firm is operating at lower than break-even point and
EPS is negative.
• Analysis and Interpretation of Financial leverage
Sr. No. Situation Result
1 No Fixed Financial Cost No Financial leverage
2. Higher Fixed Financial cost Higher Financial Leverage
1. When EBIT is higher than Financial Break-even point Positive Financial leverage
4. When EBIT is levy then Finance Break-even point Negative Financial leverage

1.3.9 Financial Leverage as ‘Trading on Equity’

A
• Financial leverage indicates the use of funds with fixed cost like long term debts and preference share capital
along with equity share capital which is known as trading on equity.
• The basic aim of financial leverage is to increase the earnings available to equity shareholders using fixed cost
fund.
• A firm is known to have a positive leverage when its earnings are more than the cost of debt.
• If earnings is equal to or less than cost of debt, it will be an unfavourable leverage.
• When the quantity of fixed cost fund is relatively high in comparison to equity capital it is said that the firm is
‘’trading on equity”.

1.3.10 Financial Leverage as a ‘Double edged Sword’

M
• On one hand when cost of ‘fixed cost fund’ is less than the return on investment financial leverage will help to
increase return on equity and EPS.
• The firm will also benefit from the saving of tax on interest on debts etc. However, when cost of debt will be
more than the return it will affect return of equity and EPS unfavourably and as a result firm can be under
financial distress. This is why financial leverage is known as “double edged sword”.
• Effect on EPS and ROE :
When, ROI > Interest – Favorable Advantage
When, ROI < Interest – Unfavorable – Disadvantage
When, ROI = Interest – Neutral – Neither advantage nor disadvantage.

1.3.11 Combined Leverage

i
• Combined leverage maybe defined as the potential use of fixed costs, both operating and financial, which
magnifies the effect of sales volume change on the earning per share of the firm.

1.3.12 Degree of Combined Leverage (DCL)

• Degree of combined leverage (DCL) is the ratio of percentage change in earning per share to the percentage
change in sales. It indicates the effect the sales changes will have on EPS.
• Like operating leverage and financial leverage, combined leverage can also be positive and negative combined
leverage.
• Analysis and Interpretation of Combined leverage.
SR. No. Situation Result
1. No Fixed Cost and Fixed Financial Fixed Cost No Combined leverage
2. Higher Fixed cost Higher Combined Leverage
3. Sales level higher than break-even level Positive combined leverage
4. Sales leverage lower than break-even level Negative Combined leverage

By CA Swapnil Patni Buy Books & PD from www.swapnilpatni.com 82

 1 - 10

1.4 IDEAL COMBINATION OF LEVERAGE

• Combined leverage is analysed by reference to the combination of DOL and DFL, as under-

DOL DFL Effect Reasons and Significance

High High Risky High DOL - High operating risk - High fixed costs& BEP.
High DFL - Small fall in EBIT will lead to greater fallin EBT.
High Low Careful am High DOL’s impact is sought to be set off with low financial risk. Hence equity
shareholders interest is safeguarded.

Low Low Cautious & Low DOL - Low operating risk - Low fixed costs & BEP. But Equity
Conservative shareholder’s gains are notmaximized, since DFL is low.
Low High Preferable Low DOL - Low operating risk - Low fixed costs & BEP. Due to high DFL
(favorable gearing), small rise in EBIT leads to greater rise in EBT and EPS.
Hence Equity shareholders gains are maximized.

1.5 RELATIONSHIP BETWEEN SALES & CAPITAL EMPLOYED

• Increase in sales leads to increase in EBIT, EBT and ROI. Hence, a firm may be tempted to try to raise its
capital Turnover Ratio (i.e. Sales ÷ Capital employed) without restraint, merely by increasing the numerator
(i.e. Sales).
• However, as a sales increases, there is a need for increase in the amount of capital base (i.e. funds employed),
both fixed assets and net working capital. Extra production can be achieved only by installing more
machinery (i.e. Fixed Assets). Increase in activity levels also entail more purchase of Raw materials (hence
more stockholding and creditors), more money blocked in debtors, etc.
• Hence, as sales increases, both current assets and current liabilities also increase, but not necessarily in
proportion to the current ratio. Hence current ratio may register a fall and affect the liquidity position of the
firm adversely.
• To avoid this adverse effect, an increase in sales and activity levels, must be supported by an adequate capital
base and increase in the amount of funds employed, more particularly in working capital.

ICAI Module Questions

Date : N.B. Pg. No Stars : Illustration 1

Q.1 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. seepage
(b) If sales are up by 10%, then COMPUTE the impact on EBIT ?

Point To Be Noted : _______________________________________________________________________________

____________________________________________________________________________________________________

____________________________________________________________________________________________________

By CA Swapnil Patni Buy Books & PD from www.swapnilpatni.com 83

Ch - 1 Financial Decisions - Leverages

I change in sales

return on investment
interest bat fig
Comparision blw companies
t change in EPS
calculate PAT
f change of in EPS
degree change

Debt capital
asset turnover ratio
EBT zero
if decegaseveerages
increase
Use Fr
of
2 situations 2 plans
analyzing schemes
asset turnover
different EPS
Income statement
P v ratio

leverages PIVratio
asset turnover ratio
increase in units
percentage changes

CA Inter FM-ECO
aerated CA Swapnil Patni 1
 similar to 915
I change in EPS
EBI 7

Return onyield
Earning capital
employed
pre tax interest
negative interest

different situations
percentage changes
EPS leverages
Beta
leverages EPS
. change in units
percentage changes
comparision
of Companies
Alternative Schemes
margin of safety
DFL preferenceDividend

CA Inter FM-ECO CA Swapnil Patni 2

need
 SUPER STAR QUESTIONS

Q8. Practical Q4
Q10. Practical Q10
Q13. Practical Q8
Q26. PY Nov 19
Q27. PY Jan 21

Q11. Practical Q6
Q14. Practical Q9
Q16. Additional Question
Q40. RTP Nov 22
Q24. PY Dec 21

CA Inter FM-ECO CA Swapnil Patni 3

need
 LEVERAGE
combined
Financial DCL
DFL Operational occurs due to
occurs due to IDOL both fired
finedfinancial occursdue to financial cost
cost
fired operational and operational
cost eg rent
eg Interest cost
depreciation salary
knample
1 With fined cost
ve ve
Before
Sale 10,0002 20,000 5,000
H Variable Cost 13,0001 16,0007 1,500

contribution 7,000 14,000 3,500

It cost 14,0007
fined rent 14,0001 14,0001
eg salary
E BIT 3,000 10,000 500

Um
12 without fined cost

Sale 10,000 2times 20,000

Variable cost 13,000 16,0001

contribution 7,000 14,000

it cost
fined 10 o

EB IT 7,000 14,000

CA Inter FM-ECO CA Swapnil Patni 4

sees
 DOL Conti
EBIT
i 11 DOL 7,000 2.33 times
3,000

3000 2.33 3 000 10,000

increased
by2.33times
4 Doc I time
Eff
Whenfined cost is zero DOL would always be't

13 cost
high fined
sale 101000 201000
Variable cost 3,000 6,0001

contribution 7,000 14,000

it cost
fined 6,000 61000

EB IT 1,000 8,000

DOL 7,000 F times

1,000

conclusion cost Doc

fined
1 4,000 2.33 times
2 6,000 7 times

cost increases Dol increases Hence

If fined leverage more risk is more

CA Inter FM-ECO CA Swapnil Patni 5

ends
 Summary
companies like
PVR Air India
cost like rent
having
interest
high fined will
have more leverage
salary
Although there is no sale during
coccid still all such
fined cost
remain constant Hence company
is high risk investor
As an
taking
should
we prefer to invest in a
low fined cost
company
well
having love
as as
leverage

case
study
Air India 1,000 aircrafts
Debt 10,000 Cr Adverse impact
ofleverage
ROI 181 ROI 6 f
Int 101 Fut 101
Profit St loss 141

Interpretation of leverage
DFL S5 Doc 5

Debt stil
Id
fined cost 545
Int Rent Salary
Risk Ed Risk
5

Benefit Ed Profit 5T
so
Profit

CA Inter FM-ECO
e CA Swapnil Patni 6
 Lets understand Doc DFL DCL with
the help of following example
FY 23 F 24
change
Sale 20,000 24,000
Variable cost 61000 17,2007 20.1
13011
contribution 14,000 16,800 201
it cost
fined 4,000 9,000 of

E BIT 10,000 12,800 281

1 I Interest 15,000 151000 of

EBT 5,000 7,800 561

Answer

DOL Contribution Change in EBI

EBIT YES i change in Sales
14,000 281
10,000 207
1.4 1.4

EB17 change in EBT

DFL By
DEE change in EBM
10,000 561
5,000 281
2 2
DCL DOLX DFL
1.4 x 2
2.8
DCL Conti taint
H EBT IEE Dry i change in Sales
I change in EBT
tchangeinEBT
CA Inter FM-ECO CA Swapnil Patni 7
 Dee Conti I changein EBT
Fi EBT EFF t changein Sales

561
15,88
0 201
2.8 2.8

Doc f change in EBM

f change in sales

Particulars Aunt

Sale 50100,000
Variable cost 20,001000

contribution 30,001000
it cost 125,0010001
fined
E BIT 5,001000

a DOL Contribution
EBIT

30,001000
5,001000

CA Inter FM-ECO CA Swapnil Patni

so 8
 b DOL I change in EBIT
I change in sale

6 I change in EBIT
101
I change in EB.IT 601
i new EBIT 5,001000 60 5,00 000
8,001000

Doc Conti
EBM

Particulars A B C D
Sales 1,001000 1,601000 2,501000 350,000
1 variablecost 130,000 801000 1,001000 2,501000

contribution 70,000 80,000 1,501000 1100,000

1
finedcost 1601000 140,000 11100,000 nil

EBIT 10,000 40,000 50,000 1,001000

DOL Conti 701000 s 1,501000 1 00,000

EBIT 10,000 50,000 1,00 000
7 2 3 1

CA Inter FM-ECO CA Swapnil Patni 9

so
 ROI PAT
shareholders fund

Particulars Aunt

Sale 24,001000
Variable cost 12,001000

contribution 12,001000
it cost
fined 10,001000

EB T 2,001000
It Interest 11,001000
10100,000 101

EBT 1,001000
1 i Jax 501 50,000

PAT 50,000

a DOL Contri 121001000 g

EB y 2,001000

b DEC Eggs 2,001000 2

1,001000

CA Inter FM-ECO
e CA Swapnil Patni 10
 C DCL DOC X DFL
6 2
12

d ROI PAT
Shareholdersfund

50,000
10100,0007100

51

e t change in EBM
Dog
i change in Sale

6 f change in 5317
251

t change in EB 7 1501

new EBIT Old EBM 1501 old EBM

new EBIT 2100,000 1501 2100,000
new EBI T 5,001000

Other interest Balancingfigure

CA Inter FM-ECO CA Swapnil Patni 11

 5100,000
No
of shales 50100,000
10
Interest 37 Lakh x 121 4,441000

Sale 84100,000
variable cost 160185,800

Contribution 23 14,200
fined cost 6,96 000

ii
E BIT 16 18,200
t latest 9144,000 16118,200 1.49
EBT
F Other Int
Balancingfigure
EBT 1119,8880400
1 7 Jax 401 4,341416

PAT 6,51 624

II no
ofshares 5,001000

EPS 7.30

i Doc Conti 1.43

EBIT 2,311310

wi DFL 16 18,200 1.49

53,4 10,86 040

wii Dec 1.49 1.43

2.13

CA Inter FM-ECO CA Swapnil Patni 12

so
 DFL
Eff interest

out EBM
Working note find
AA B
DFC EBIT DFC
EBT Effy
3 EBIT 2 E BIT
EBIT Interest EBIT interest
3 EBI 2
EBIT 20,000 ÉB 1,001000

in EBIT 30,000 EBIT 2,001000

out and
working note
find
sales
contribution

A
DOC Conti DOC Conti
EB T EBIT
5 2
Coffs Giotto

Contribution 30,000 Contribution 4,001000

CA Inter FM-ECO
a CA Swapnil Patni 13
 Sales00137500 Sales 8,001000
V cost 2,251000 H V cost 14,0010007
50
contri 4011,501000 contre 4,00 000

fined cost 1.20.000 finedcost 12,001000

E BIT 30,000 EBT 2,001000

Doc and Dre B Ltd is betterplaced

Considering

read formulas

Conceptal Understanding
change
Sale 101000 14,000 401
H Variable cost 2,000 2,800 407
go
Coutee 8,000 11,200 401
I I
fined cost 3,000 3,000 Of

E BIT 5,000 8,200 641

f Interest 2,000 2,000 Of

EBT 3,000 6,200 1061

1 Tax 501 1,500 3,100
PAT 1,500 3,100 106 I
100
no
ofshares 100
EPS 15 31 1061
CA Inter FM-ECO CA Swapnil Patni 14
so
 I change in EBT PAT EPS are same

hence we can use EBT PAT EPS

In the DFL Dee and
anwar
foemulla
will remain the
same

DOL change in EBIT

Fal t
change in sales

2 t changein EBT
Dry I
Change in EB 7
3 Dec i change in ERS
i change in Sales

And
Particulars Aunt

Contribution 33,07 500

I I cost 1157,500
fined
EB T 31 50,000
1I Interest 17,501000

EBI 14 00,000

DOL 33 07,500 1.05

Config 31 150,000

DFL 0 2.25
Eff 3,14
8 0

CA Inter FM-ECO CA Swapnil Patni 15

so
 DCL 2.25 1.05
2.3625

Deter t change in EPS

i in sales
change
2.3625 f change in EPS
101

I
change in EPS 23 6251

Basic calculations

Particulars Aunt E

Contribution 3,751000
it 13112,500
fined cost
E BIT 62,500
1 1 Interest 46,875

EBT 15,675
H Jax 301 14,687.5
EAT 10,938

CA Inter FM-ECO CA Swapnil Patni 16

8
 Working note 1
Doc Conti
EBIT

6 3,751000
EBIT
i EB T 62,500

Working note 2

DFL EBIT
EBT
4 62,500
EBT
EBT 15,625

CA Inter FM-ECO CA Swapnil Patni 17

8
 Particulars 19 20 20 21

Sold 1,201000
Price
Qty
Unit 12
001000
12
i Sale Value 14 90,00 12,001000

1 Variable cost 8 g
f u
i V cost 9160,000 8100,000

contre Y 80,000 4100,000

I I
fined cost 2,001000 2,001000
EBIT 2,801000 2,001000
11 Interest 7,001000 1,001000

EBT 1,801000 1,00 000

C Jax 301 54,000 30,000

PAT 1126,000 70,000

no
of shares 10,000 10,000
i EPS 12.6 77

DOL 1.71 2
Coty
DFL 1.55 2
EEF
t change in EPS
12 x100
fi
44.44 t decreased
ffgx100
CA Inter FM-ECO
c CA Swapnil Patni 18
 Particulars Aunt E

Sales 20100,000
1
variable cost 110,001000

contribution 10,001000
A
fined cost 16100,0003

EBIT 4,00 000

A Interest 11150,000

EBT 2,50 000

11 Tax 11125,000

PAT 1,251000
no
ofshares 1,001000

EPS 1.25

Wailing notes
1 DOL Coutee
EBIT
2 5 10,001000
EBIT

EBIT 4100,000

CA Inter FM-ECO CA Swapnil Patni 19

so
 2 BCL f Change in EPS
I change in sales

4 DOL DFL
4 2.5 X DFL
DFL 1.6

3 DFC E BIT

16
41088

EBT 2,501000

9 Debt Capital 1,501000

Gi 1Gt
937500

Pluratio Cosutig Total assets DTE

CA Inter FM-ECO CA Swapnil Patni 20

so
 note 1 DCL DOLT DFL
Walking 2 2.5 X DFL
DFL 1 25

2 DFL
EBay
1.25
ÉBB Interest

1 25
ÉB 242,000
E BIT 12,101000
3 Income Statement
Particulars Aunt E Aunt E

Sales 50,00 000 18177,419100

Variable cost 134,501000 12,951419769

3t
Contribution 15150,000 582,000
1 Cost
fined 3,401000 3,401000

EB 7 12110,000 2142,000
11 Interest 12142,0007 2,421000

EBT 9,681000 0
H Jax 30 f 12,190,400

PAT 6,77 600

11 no
ofshares 3140,000
EPS 1.99

CA Inter FM-ECO CA Swapnil Patni 21

08
 4 PIV ratio Contri 15,501000 3
Sales 50,00000

5 Asset 7 0 Ratio

Total Assets DTE

30,251000 34100,000
64,251000

Industry 7 0 ratio 1.5

Industry would have made the sale of

64,251000 x 1.5
96,371500

Our sale 50100,000

Due TO ratio is lower than

Industry

Alternatively students can solve

by
considering Doc first In that case
answer
Kindly check
the ICAI may vary
module Answer

CA Inter FM-ECO CA Swapnil Patni 22

 Particulars DOL DCL

M 0.92 1.14
22g 331
N 1 26 0.96
311 2ft
P 38 f 52 0.92
251 23,1

Q 4231
1.87 1.17
231
R 1.6 1.12
151 It

CA Inter FM-ECO CA Swapnil Patni 23

so
 PLAN
fined cost
15,000
fired cost
20,900
t
In a B

Particulars
fined cost
fined cost
15000 20,000
A B A B
Sales 90,000 90,000 90,000 90,000
Variable Cost 45,000 45,000 45,000 451000

Contribution 45,000 45,000 45,000 45,000

H
fined cost 15,000 15,000 20,000 20,000

EB 7 30,000 30,000 25,000 25,000

H Interest 2,000 1,000 2,000 11000

EBT 28000 29,000 23,000 29,000

DOL Contai 1.5 1.5 1.8 1.8

EBT

DFL EDIT 1.07 1.03 1.09 1.04

EBT

DCC DOC 1.605 1.545 1.962 7.872

DFL
1

CA Inter FM-ECO CA Swapnil Patni 24

8
 Sales Assets x Asset turnover
ratio

Working note 1 Sales Assets x2 S

48,001000 x 2.5
1,20 00,000
2 Income Statement

Particulars Aunt E

Sales 1,201001000
11 Variable Cost 17400,000
contribution 48100,000
cost
it
finedEBIT 128100,000
20,00 000
Interest 4120,000
EBT 15,801000
It Jax 301 14174,000
PAT 11106,000
I shales 11001000
no
of
EPS 11 06
Conti EBT 3.04
Dcc
CA Inter FM-ECO CA Swapnil Patni 25
so
 Particulars Aunt EPS 4 EPS 2 EPS O

Sales 90,001000
HV Cost 601 54100,000

Contribution 36100,000
finedcost 110,001000

EBIT 26100,000 27,651714 16122,857 4,801000

Interest 4,801000 14,8010007 4,801000 4,801000

EBT 21,201000 22,851714 11142,857

H Jax 301 6136,000 6185,714 3142,857 q
PAT 14,841000 16100,000 8100,000 0
F no shales
of 4,001000 4100,000 4,001000 4,001000

EPS 3.71 4 2 0

Dolcoutri EBM 1.38

Dfe EBM EBT 1.23

DCLDOLXDF 1.6974

CA Inter FM-ECO CA Swapnil Patni 26

so
 Working note 1 Sales Assets x5
1,00 00,000 5
5,00 00,000

2 Income Statement

Particulars Aunt E

Sales 5100100,000
variable cost Got 3,001001000
Contribution 2,001001000
cost
fixedEBIT 20100,000
1,80 00,000
Interest 16,001000
EBT 1174100,000
H Jax 251 43150,000
PAT 1,3050,000
CA Inter FM-ECO CA Swapnil Patni 27
ooo
 a DOL Conti 200,001000 1.11
EDIT 1,801001000

b DFL EDIT 80100,000 1 03

EB 1174100,000

C DCL DFL x DOC

1 03 x 1 11
1.1433

Working note 1 Sales Assets 72.5

30,0000,000 2.5
75,001001000

2 Income Statement

Particulars Aunt E

Sales 75100100,000
Variable cost Got 145,001001000
CA Inter FM-ECO CA Swapnil Patni 28
8
 Contribution 30,001001000
it Cost 16100100,0007
fined
EBIT 24100,001000
Interest 12,251001000

EBT 21,751001000
14 Tax 401 18,7010010007

PAT 13,051001000
f shales 75,001000
no
of
EPS 17.4

DOL Couthie 30,00 00,000 1.25

EB 7 24,00100 000

DFC 29,001001000 1.10

EBay 21175,001000

DCC DFL X DCL

1.10 1.25
1.375

CA Inter FM-ECO CA Swapnil Patni 29

so
 Working note's Sales Assets 4
6100,000 4
24,001000

Income Statement
Particulars Ant EPS I EPS 2 EPS O

Sales 24,001000
Variable Cost 14,401000
Got
Contribution 9,601000
cost
fined 12,001000

EB 7 7,601000 49,714 75,429 291000

Interest 24,000 24,000 24,000 241000

EBT 7136,000 25,714 51,429 0

11 Tax 301 12,201800 7,714 115,429 0

PAT 5 15,200 18,000 36,000 0

f no
of shares 18,000 18,000 18,000 18,000

EPS 28.62 1 2 O

DOL 1.263
Coff
DFL 1.033
EBay
DCL DFLxDOL 1.304

CA Inter FM-ECO CA Swapnil Patni 30

one
 Particulars Aunt E Aunt E

Sales 2,001000 2,401000

Pty
SP pie 10 10
Sales Value 20100,000 24,001000

v cost 6 6
1
pie
variable cost 112,001000 114140,000

contribution 8100,000 9,601000

cost
fined 4,001000 4,001000

EB T 4,001000 5,601000
1 Interest 2100,000 12100,000

EBT 2100,000 3,601000

1 I Jax 501 11100,000 1,801000

DAT 1,001000 1,801000

f no
of shares 20,000 20,000
EPS 5 9
EBIT EBT
DFL 2 1.5556
Conti Eble
Doc 2 1.7143
CA Inter FM-ECO CA Swapnil Patni 31
Boo
 Working notes I Dri
Egg
11001000
75,000
1.333
DFL y change in EBT
i change in EBM

13333 f change in EBT

lot
t Change in EBT 13 3331
2 DOL Conti 3
3,488888
EBM

Doc I change in EB T
t change in Sale

3 y change in EB 17
101
I change in EB T 301

CA Inter FM-ECO CA Swapnil Patni 32

so
 Particulars Suit E Sales A lot

Sales 5,00 000 5,501000

A variable lost 2100,000 2,201000

Contribution 3100,000 3130,000

H
fined cost 2,001000 2100,000

E BIT 1100,000 1130,000

301increase
DCL 3100,000 4
Coyt 75,000
DCL f Change in EBT
i change in Sales

4 I change in EBT
101
f change in EBT 40

raining yield Egg

other interest bat figure
CA Inter FM-ECO CA Swapnil Patni 33
see
 Particulars Ant R
Sales 84,001000
variable cost 63100,000

Contribution 21100,000
it
fined Cost 7,501000

EB T 13,501000
1I Interest 3,601000 DEL
EEL
t Other Interest 18,777
1.39 13,501000
EBT 9171,223 EBT
t Jax 301 2,911367 EBT 9171,233

PAT 6,79 856

17 shares 50,000
no
of
EPS 13.5971

DOC 1.56
Conti
DFLY DCL
Del 2.1684

13.5971 6.7986
learning Yeild EMI 200

However Student
might get different
answer 360,000 interest is considered
if DFC kuen that answer
ingrowing is acceptable
CA Inter FM-ECO
a CA Swapnil Patni 34
 revisefee tax
PE ratio
interest calculation
MPS EPS

working note I DF EB 7
EBT
15
EEB
interest
1 5
133 10,008
EBI 7 30,000
Interest calculation

1001 Income
8f
301 Jax
56y 701 Post tax
y
Pre tax interest rate
x 100 8 t
Joe
Interest 1,25 000 x 81
10,000

CA Inter FM-ECO CA Swapnil Patni 35

woo
 2 DOL
GIF
2 Conti
301000
i Contribution 60,000

3 Income Statement

Particulars Aunt E

Sales 2100,000
variable cost 1140,000

contribution 601000
I cost 130,000
fined
E BIT 30,000
1I Interest 110,000

EBT 20,000
is Jax 301 160007

DAT 14,000

DIE ratio MPS

EPS
10 140
EPS
EPS 14

no
of shares 141,0400 17,1 1,000 shares

CA Inter FM-ECO CA Swapnil Patni 36

Be
 Particulars
fined cost
fined cost
15000 20,000
A B A B
Sales 90,000 90,000 90,000 90,000
Variable Cost 45,000 45,000 45,000 451000

Contribution 45,000 45,000 45,000 45,000

H
fined cost 15,000 15,000 20,000 20,000

EB 7 30,000 30,000 25,000 25,000

H Interest 2,000 1,000 2,000 1,000

EBT 28000 29,000 23,000 29,000

DOL 1.5 1.5 1.8 1.8

DFC 1.07 1.30 1.08
DCL 1 60 1.55 195

CA Inter FM-ECO CA Swapnil Patni 37

robs
 ROE EDIT Debt
We use Equity
EBIT above as cit shows five profits

Particulars Aunt E

Sales 75100,000 22,89 091

1 7 Variable cost 142100,000 12,79 091
5Gt
Contribution 33,001000 10,051000
1 I
fined
EB 17
Cost 6100,000 6,001000
4,051000
27,001000
1 I Interest 14,051000 4,05 000
EBT 22,951000 O

ie ROI EBI 27100,000 00027

Debt 55100,000 45,00
lequityt
in The company's ROI is 271 and financialleverage
is 91 company is having favourable financial
leverage

iii Industry To ratio 3

Industry would have 45,001000

5500000 3
made sale 3,00 00,000
of
Our sale 75,00 000
Thus our capital 7 0 ratio is less
CA Inter FM-ECO CA Swapnil Patni 38
Mom
 DOC 33100,000 1 222
Cozy 27100,000

DFC EDIT 27100,000 1.1764

EBY 22195,000

DCL DFC XDOL

I 1764 1.2222
1.4379

Dole t change in EDIT

f change in Sales

1 222 i change in EBIT

101
f change in EB T 12.2221

CA Inter FM-ECO CA Swapnil Patni 39

BOB
 Working note 1 Sales
Sales Assets x2 5
400 Ce x 2.5
1,0006

Particulars Aut E in crores

Sales 1000
H variable cost 650

Contribution 350
fired cost 80

EB 7 270
1 I Interest 130

EBT 240
1 I Jax 401 196

PAT 144
H shares 10
no
of
EPS 14.4

DOC Conti EB17 1.2963

EBM EBT 1.125
Pf DFCXDOL I 4583

CA Inter FM-ECO CA Swapnil Patni 40

too
 ie Particulars Doc

Aud 0.63
2331
Bud 3254
s

CHI 0.90
22h
Dad 330 0.94

It is level specific

Doc leads to beta

iii
High When DOC is
high
0.63 least
at that time beta is 1 minimum
and when DOL is 1.46 high at that time
beta is 1.65 maximum

in content
Working note
ITC
of 0.26 RIL
learning yeild 100 learningyield Isoox100
1
4.5.1 2.41

CA Inter FM-ECO CA Swapnil Patni 41

no
 Particulars Basic it
by201 by201
Sales 3140,000 4,081000 2,721000
variable cost 160,000 72,000 48,000

Contribution 2,801000 3136,000 2124,000

fined Cost 1601000 60,000 160,000

EBIT 2,201000 2176,000 1,641000

1 Interest 160,000 60,000 60,000

EBT 1160,000 2,161000 1,09000

H Jax 56,000 75,600 36,400

PAT 104000 1 67.600

d DOL
a DFL
1.27
1 37 30
1.21
1.27
1.36
1.57
iii DCL 1.7399 2.1352
vie EPS 1.3 1.755 0.845

CA Inter FM-ECO CA Swapnil Patni 42

soon
 Income statement
Particulars Ant E

Sales 48,000 1001

H variable cost 36,000 757

Contribution 12,000 251

H
fined lost 81000

E BIT 4,000
14 Interest 2,000

EBT 21000
H Jax 301 1600

PAT 1,400

note
Working
DFL EBIT EB T
EBT EBIT Interest

2 EDIT
EDIT 2,000

ZEB T 4,000 EB T
i EBIT 4,000

DOL Conti

3
If
Conti i Conti 12,000

CA Inter FM-ECO
noooo CA Swapnil Patni 43
 Particulars Base Option Option 2 Option
Sales unit 1,001000 7150,000 7150,000 7,501000
SP p.u 40 40 40 40
Sales value 40,001000 60100,000 60,001000 60,001000
variable costp.ie 20 18 18 18
variable cost 20,001000 27100,000 27100,000 O
Contribution 20,001000 33,001000 33,001000 33,001000
fined cost 10100,000 15,001000 15,00000 115,001000
EBIT 10100,000 18,001000 18,001000 18,001000
f Interest 70,000 70,000 70,000301000 70,000 60,000
EBT 9,301000 730,000 17100,000 16170,000
Jax 401 3172,000 6,921000 6,801000 6168,000
PAT 5,581000 101381000 1188880,1 0
F no
18 8
shales 1100,000 11009 81000
EPS
of 5.58 5.19 6.68 10.02
CA Inter FM-ECO CA Swapnil Patni 44
room
 Since Option 3 is
giving the highest EPS it is the
best option

Income statement
Particulars Aunt E

Sales 1,00 00,000

It variable cost 73100,000
Contribution 27,001000
1I Cost
fined
EBIT
4 501000
22150,000
1 I Interest 10100,000
EBT 12,501000
1 DFL E BIT EBIT
EB EBIT latest

18 EDIT
EDIT 10,001000

i EB 7 22,501000

2 DCC DOL XDR 3 DOC Coutee

2 16 1.2 X DFL EDIT
i DFL 1.8 1.2 Conti
22150,000
CA Inter FM-ECO CA Swapnil Patni 45
took
 Conti
27100,000
4 PIV ratio
100
Costly
27100,000 x 100 277
1,00 00,000

Docking note 1 Doc

Conley
k Sales
4 N 6,00 ooo
O In 30,000
0.4N t 1,20 000 N 6100,000
O On 7120,000
i n 12100,000

CA Inter FM-ECO CA Swapnil Patni 46

SEE
 Income statement
Particulars Ant E

Sales w 72,001000
V cost 6,001000 6100,000

contri n 6100,000 6100,000

f fined cost 4,501000

EB T O IN 30,000 1150,000
1 Interest 301000 30,000

EBT 0 In 1120,000
Tax 501 160,000

ya 0.05W 60,000

DFL 1 50,000 1.25

EBELL
1120,000

DCC DFC X DOC

1 25 4
5

DCL t in EPS
change
I change in sales

5 1 change in EPS
57
i I change in EPS 251

CA Inter FM-ECO CA Swapnil Patni 47

see
 Revise return Capital Employed
ofand
Pee tax
posttax
Particulars Ant E

Sales 86100,000 49,28 571

f Variable Cost 55,901000 28178,571

Coutiibutiou 351.30 I0,000 15150,000

cost
is
fined 10 00,000 10,001000

EBIT 20 10,000 5,501000

f Interest 5,501000 5150,000

EBT 4160,000 0
1 I Jax 401 5184,000

EAT 8176,000

DOL 1.99
Cage
CA Inter FM-ECO CA Swapnil Patni 48
see
 DFL 1.37
Effy
Des DR X DOC
2.04

Interest 5 50,000
EBI T 20,101000

EBM is
Hence
much
higher than isInterest
financial leverage favourable

DOL Y change in EBIT

I change in sales

1 49 change in EB 17
lot
in t Chang in EB 7 14.9

ROLE

s
u
Pee Tax Post Tax
v u

InteresttPAT Interested
EBI
20110,000 x 100
1,3000,000
15.46 f

CA Inter FM-ECO
e CA Swapnil Patni 49
 DFL
DefenceDividend
Only Tut gut pp
DFL EBI DFL EDIT
EBT EDIT Int
PItax
EB T 10,000
H Int 2,000
for interest we require
fee tax funds thats
EBT 8,000 Why 2000 2000
f Tax sot 4,000
foe DD we require
EAT
PD
4,000
4,000
Lost
thats
tax funds
why
Distributable O 2000
profit
79
208g
4000

DFL
Eff int PD l tax

Working note 1
DOL Coutee
EBM
CA Inter FM-ECO CA Swapnil Patni 50
so
 3 125 00 EBI 7 1,361000
4,28

2 Dcc t change in Conti

f change in sales
2.5
198,1
3 DCL DFC X DOL
2 5 DFL X 3 125
DFL O S

Y 0.8 EB T
EBM Interest
Tax
0.8 1136,000
136,000 Tut 15,000
1 0.5

0.8 1,36 000

1136,000 tut
15,88
Interest 64,000
i
Income statement
Contribution 4125,000
1I cost
fined
EBIT
2,891000
1136,000
1I Inteest 64,000
EBT 2,001000
H Jax 501 1100,000
PAT 1100,000
I I DD 15,000
DP 85,000
4 no shares 2500
of
EPS 34
CA Inter FM-ECO CA Swapnil Patni 51
 DrulPD
Tenth Ifaf
Particulars Plant Plant Plant Plant

E BIT 521001000 521001000 52,001000 52100,000

1 put 12 3172,000
H Int 91
i 3,511000
EBT 52100,000 48 88,000 48,491000 52100,000
1 Jax 401 20180,000 19,551200 19,391600 20,801000
EAT 31 000 291321800 29109,400 31120,000
1
pref dividend 2,341000
a 31120,000 29,321800 29109,400 28,861000
b no
ofshares 20,801000
netyamings
C EPS a b 1.5
18,201000 16,901000 16,901000

too i ios

DEL in case of
preference dividends

E BIT
CEBIT int
P1
52100,000 s
52,001000 0 213,410.0400
CA Inter FM-ECO CA Swapnil Patni 52
no
 Self Assessment Questions

CA Inter FM-ECO CA Swapnil Patni

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