Sanjib Sharma | 8961676818

RISK AND LEVERAGE

1. Write short note on Risk facing Equity Shareholders. What do you mean by Business Risk and
Financing Risk?
Residual Earnings: A Firm can raise funds through a combination of - (a) Debt, (b) Preference Capital, and
(c) Equity Capital. Of the three sources, Equity Shareholders are entitled to Residual Earnings, i.e. after
paying Interest on Debt, and Preference Dividend.
2. Components: Risk facing Equity Shareholders has two components - (a) Business Risk, and (b) Financial
Risk. A comparison is given below -
Risk Business Risk Financial Risk
(a) Meaning It is associated with the Firm's It is the additional risk placed
operations, and refers to the on Equity Shareholders due
uncertainty about future Net to the use of Debt Funds.
Operating Income (EBIT).
(b) Measurement It can be measured by the It can be measured using
standard deviation of the ratios like Leverage
Basic Earning Power, i.e. Multiplier, Debt to Assets,
ROCE. etc.
(c) Linked to Economic Climate. Use of Debt Funds.
(d) Reduction Every Firm would be A Firm which is entirely
susceptible to Business Risk financed by Equity (i.e. an
due to changes in the overall Unlevered Firm) will have
economic climate & business almost no Financial Risk;
operating conditions.

3. Risk & Return Relationship: The higher the risk, the higher the return expectations. Hence, the
expectations of Equity Shareholders are higher than that of Debt-holders and Preference Shareholders.
Therefore, Equity constitutes the costliest source of funds, and Debt constitutes the cheapest source of
finance for the business.
Note: A Firm which has debt in its Capital Structure is called as a Levered Firm, whereas a Firm having no
debt, I.e. financed only by Equity, is called Unlevered Fiffm.
2. What are the components of Financial Risk?
Financial Risk is of two types-
1. Risk of Cash Insolvency (also called Financial Distress Risk): As a Firm raises more debt, its
commitment towards debt service and the risk of cash insolvency increases, due to two reasons -
(a) Interest: The higher the debt content in the Capital Employed, the greater the amount of interest
payable, even in years of insufficient profits.
(b) Principal: The Principal has to be repaid In committed instalments, even if sufficient cash is not
available.
2. Risk of variation in the EPS: Equity Shareholders are entitled to Residual Earnings only, i.e. Earnings
after meeting Interest, Tax and Preference Dividend. The risk of variation in EPS will be as under -
(a) As interest increases, there will be lower probability that Equity Shareholders will enjoy a stable
dividend.
(b) As a result of Financial Leverage, if debt content is high in the capital structure, the risk of variations
in expected earnings available to Equity Shareholders will be higher.
3. What is “Leverage’’? What are the leverages used In financial analysis?
1. The term Leverage in general, refers to advantage gained for any purpose.
2. In financial analysis, Leverage is used by business Firms to quantify the risk-return relationship of
different alternative capital structures. Leverage magnifies the effect of changes in Sales, on EBIT and
EPS.
3. Study of Leverage is essential to define the risk undertaken by the Company's Shareholders. Earnings
available to Equity Shareholders fluctuate on account of two risks -
(a) Variability of EBIT, i.e. Operating Risk: arises due to variability of sales and variability of expenses, &
(b) Variability of EPS or ROE, i.e. Financial Risk: arises due to the impact of interest charges.
4. There are three commonly used measures of leverage in financial analysis. These are -
(a) Operating Leverage - for measuring the impact of Fixed Operating Costs,
(b) Financial Leverage - for measuring the impact of Interest Expenses,
(c) Combined Leverage - for measuring the impact of both Fixed Operating Costs and Interest Costs.
 Sanjib Sharma | 8961676818
TYPES OF LEVERAGE
4. Bring out the meaning and significance of Operating Leverage.
1. Definition: Operating Leverage is defined as the Firm's ability to use fixed operating costs
to magnify effects of changes in sales on its EBIT.
2. Explanation:
(a) When Sales changes, Variable Costs will change in proportion to Sales while Fixed Costs will
remain constant. So, a change in Sales will lead to a more than proportional change in EBIT. The
effect of change in sales on EBIT is measured by Operating Leverage.
(b) When Sales increases, Fixed Costs will remain the same irrespective of level of output, and
so, the percentage increase in EBIT will be higher than increase in Sales. This is the favourable
effect of Operating Leverage.
(c) When Sales decreases, the reverse process will be applicable and hence, the percentage
decrease in EBIT will be higher than decrease in Sales. This is the adverse effect of Operating
Leverage.
3. Significance:
(a) Effect on EBIT: DOL measures the impact of change in sales on operating income. Suppose
DOL of a Firm is 1.67 times, it implies that 1% change in sales will lead to 1.67% change in EBIT.
Hence, if Sales increases by 20%, EBIT increases by 20% x 1.67 = 33%. Also, if Sales decreases by
say 40%, EBIT falls by 40% x 1.67 = 67%.
(b) Impact of Fixed Costs: DOL depends on the amount of Fixed Costs. If Fixed Costs are higher,
DOL is higher and vice-versa.
(c) Effect of High DOL: If DOL is high, it implies that Fixed Costs are high. Hence the Break Even
Point (BEP) would be reached at a higher level of sales. Due to the high BEP, the Margin of Safety
and profits would be low. This means that the Operating Risks are higher. Hence, the lower the
DOL, the better it is for the business.
(d) Above BEP: A high DOL means that profits (EBIT) may be wiped off, even for a marginal
reduction in Sales. Hence, a Firm should operate sufficiently above the BEP, to avoid the danger
of fluctuations in sales and profits.

5. Bring out the meaning and significance of Financial Leverage.

1. Meaning: Financial Leverage is defined as the ability of a Firm to use fixed financial charges
(interest) to magnify the effects of changes in EBIT (i.e. Operating Profits), on the Firm's Earning
Per Share (EPS).
2. Explanation:
(a) Financial Leverage occurs when a Company has debt content in its capital structure and fixed
financial charges, e.g. interest on debentures. These fixed financial charges do not vary with the
EBIT. They are fixed and are to be paid irrespective of level of EBT.
(b) When EBIT mcreases, the interest payable on debt remains constant, and hence Residual
Earnings available to Equity Shareholders will also increase more than proportionately.
(c) Hence an increase in EBIT will lead to a higher percentage increase in Earnings per Share
(EPS). This is measured by the Financial Leverage.
3. Significance:
(a) Effect on EPS: DFL measures the impact of change in EBIT (Operating Income) on EPS.
Suppose DFL of a Firm is 4 times, it implies that 1% change in EBIT v/ill lead to 4% change in EPS.
Hence, if EBIT increases by 10%, EPS increases by 10% x 4 = 40%. Also, if EBIT decreases by say
5%, EPS faMs by 5% x 4 = 20%.
(b) Impact of Fixed Financial Charges: DFL depends on the magnitude of interest and fixed
financial charges. If these costs are higher, DFL is higher and vice-versa.
(c) Effect of High DFL: If DFL is high, it implies that fixed interest charges are'high. This means
that the financial risks are higher. In such a case, the Firm is justified in borrowing / using Debt
Funds, only when it is able to earn at a rate higher than what it has to pay towards interest on
debt.
 Sanjib Sharma | 8961676818
(d) ROCE vs Interest Rate: DFL is considered to be favourable or advantageous to the Firm, only
if Return on Capital Employed (ROCE) is greater than Rate of Interest on Debt. In such a case,
the use of debt funds is justified, thus magnifying the Residual Earnings available to Equity
Shareholders.
Note: When the Company has both Debt and Preference Capital, DFL =
𝐸𝐵𝐼𝑇
𝐸𝐵𝐼𝑇 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 − 𝑃𝑟𝑒𝑇𝑎𝑥 𝑃𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑
6. Outline the significance of Combined Leverage.
1. Meaning: Combined Leverage is used to measure the total risk of a Firm, i.e. Operating Risk
and Financial Risk.
2. Explanation: Effect of Fixed Operating Costs (i.e. Operating Risks) is measured by Operating
Leverage (DOL). Effect of Fixed Interest Charges (i.e. Financial Risks) is measured by Financial
Leverage (DFL). The combined effect of these is measured by Combined Leverage (DCL).
3. Significance: DOL measures impact of change in Sales on EBIT. DFL measures the impact of
change in EBIT on EPS. DCL measures the combined impact, i.e. effect of change in Sales on EPS.
If DCL is 2 times, it implies that a 10% increase in Sales will lead to 20% increase in EPS.
7. Should Degree of Financial Leverage be high or low?
Justification for using Borrowed Funds: The primary issue to be answered In Financial Leverage
is whether the Company is justified in using Debt Funds, which involve a fixed interest
commitment, irrespective of the level of EBT.
ROCE vs Cost of Debt: A Firm can borrow, i.e. use Debt Funds, only when Rate of Return from
the Investment / Capital Employed is higher than the Interest Rate on Debt. Therefore, to
determine whether a firm is financially favourably leveraged, ROCE should be compared with
Rate of Interest on Debt.
Situation Effect Remarks
(a) ROCE > • The Company earns at a higher rate of Use of Debt Funds is
Interest Rate return on its investment, and pays a Justified. A high DFL Is
lower rate of interest to the suppliers of preferable.
long term debt funds. (Trading on Equity [or]
• The difference between EBIT and the Gearing Effect)
cost of debt funds would enhance the
earnings of Equity Shareholders. This will
maximize ROE and EPS.
(b) ROCE = • The Company's rate of earnings (ROCE) Either Equity or Debt
Interest Rate Is equal to the rate of interest on debt. Funds may be used.
• In such case, there is no substantial / (Indifference Point)
disproportional Increase in ROE or EPS.
(c) ROCE < • Where the rate of Return on Use of Debt Funds
Interest Rate Investment falls below the rate of involving fixed interest
interest, fixed Interest Costs have to be at
met, irrespective of the level of EBIT. principal
• Therefore, Equity Shareholders suffer commitments, is
because their earnings fall more sharply not justified. A low DFL
than the fall in the return on investment. is preferable.
In such cases, a high DFL is
disadvantageous.
Favourable DFL: DFL is considered to be favourable or advantageous to the Firm, only if Return
on Capital Employed (ROCE) is greater than Rate of Interest on Debt.
8. What is the ideal combination for combined Leverage?
DOL DFL Effect Reason and significance
High High Risky High DOL implies High Fixed Costs & BEP, leading to
High Operating Risk. When this is coupled with High
DFL, i.e. use of debt funds, even a small fall in EBIT
 Sanjib Sharma | 8961676818
will lead to greater fall in EBT. Equity Shareholders
are most affected.
High Low Careful 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 implies Low Fixed Costs & BEP, leading to
Conservative Low Operating Risk. But Equity Shareholders' gains
are not maximized, since DFL is low.
Low High Preferable Low DOL implies Low Fixed Costs & BEP, leading to
Low Operating Risk. Due to high DFL (favourable
gearing), small rise in EBIT leads to greater rise in
EBT and EPS. Hence Equity Shareholders' gains are
maximised.
 Sanjib Sharma | 8961676818

LEVERAGE
1. X Ltd. furnishes the following results for the year 2023-2024 :
Sales : 2,00,000 units @ ₹ 100 per unit
Variable Cost: ₹ 40 per unit
Operating fixed cost (i.e. depreciation, rent, staff salary etc.) : ₹ 60,00,000
Financial fixed cost (i.e. interest on borrowed capital): ₹ 20,00,000
Please compute : (a) DOL (i.e Degree of Operating leverage)
(b) DEL (i.e. Degree of financial leverage)
(c) DCL (i.e Degree of Combined leverage)

2. The Particulars of three firms X, Y and Z are given below. Calculate DOL, DFL and DCL of each
firm and comment on the results :
X Y Z
₹ ₹ ₹
Sales Value 50,000 50,000 50,000
Variable Cost 30,000 20,000 15,000
Fixed Cost (Operating) 10,000 20,000 25,000
Fixed Financial Cost 3,500 2,000 1,000

3. (a) If the percentage change in EBIT is 50 for 20% change in sales, what would be the
measurement of DOL ?
(b) If the change in EPS is 100% for the above mentioned change in EBIT, what would have been
the DFL ?
(c) Please calculate DCL

4. Fern the following particulars calculate leverages and comment on the results
Firm A Firm B
Output (units) 10,000 10,000
Selling price per unit (₹) 10 10
Variable cost per unit (₹) 4 6
Operating fixed cost (total) (₹) 20,000 20,000
Fixed financial cost (total) (₹) 20,000 5,000

5. X Co. requests you to compute DOL, DFL and DCL from the following data:
(i) Sales : 5,00,000 units @ ₹ 20 per unit
(ii) Variable cost per unit: ₹ 7
(iii) Operating fixed cost: ₹ 26,00,000
(e.g. rent, staff salary, depreciation etc.)
(iv) Interest : @ 12% on the debentures of Rs. 15,00,000 and 14% on the long-term loan of
₹ 20,00,000.

6. The particulars of three similar firms are given below, of each firm and comment on their results:
A B C
Output (units) 1,00,000 1,00,000 1,00,000
Selling price per unit (₹) 5.00 5.00 5.00
Variable cost per unit (₹) 3.00 2.00 1.50
Total fixed costs (₹) 1,00,000 2,00,000 2,50,000
Interest on Debt Capital (₹) 30,000 10,000 Nil
 Sanjib Sharma | 8961676818
7. Calculate operating leverage, financial leverage and combined leverage under situation 1 and 2
in financial plans A & B from the following information relating to the operation and capital
structure of a company.
Installed capacity – 2,000 units
Actual production and sales – 50% of the capacity
Selling price ₹20 per unit
Variable Cost ₹10 per unit
Fixed Cost:
Under Situation I ₹ 4,000
Under Situation II ₹ 5,000
Capital Structure:
Financial Plan
A (₹) B (₹)
Equity 5,000 15,000
Debt (Rate of Interest 10%) 15,000 5,000
20,000 20,000

8. The following key information pertains to Ashika Ltd. for the year 2020-21.
₹ in lakhs
₹
Sales 82.50
Variable Cost 46.20
Fixed Cost 6.60
9% Debentures 50.00
Equity Shares (₹ 100 each) 60
Corporate Tax 35%
You are required to work out:
1. What is the Company’s ROI?
2. Does it have favourable financial leverage?
3. If the firm belongs to an industry whose asset turnover is 3, does it have high or low asset leverage?
4. What is the operating, financial and combined leverage of the firm?
5. What is the Company’s EPS?
6. What will be the expected EPS if the Sales of Ashika Ltd. increase by 10% in the next year and cost
structure as well as Financial structure remains same?

9. The selected financial data for A, B and C companies for the year ended 31st March, 2021 were as follows:
A B C
Variable Cost as a Percentage of Sales 2
66 ⁄3 75 50
Interest Expenses (₹) 200 300 1,000
Degree of Operating Leverage 5 6 6
Degree of Financial Leverage 3 4 2
Income Tax Rate 35% 35% 35%
Prepare an income statement for each of the companies.

10. From the following prepare Income statement of company A and B.

A Co. B Co.
Financial leverage 4:1 5:1
Interest ₹6,00,000 ₹ 7,00,000
Operating Leverage 3:1 4:1
Variable cost to sales 66.66% 50%
Income tax rate 30% 40%
No. of Equity Shares 1,00,000 70,000
Also Calculate and comments on EPS of the company.
 Sanjib Sharma | 8961676818
11. A company is contemplating to raise additional fund of ₹ 20,00,000 for setting up a project. The company
expects, EBIT of ₹ 8,00,000 from the project.
Following alternative plans are available :
(a) To raise ₹ 20,00,000 by way of equity share of ₹ 10 each
(b) To raise ₹ 10,00,000 by way of equity shares and ₹ 10,00,000 by way of debt @ 10%.
(c) To raise ₹ 6,00,000 by way of equity and rest ₹ 14,00,000 by way of preferences shares @ 14%.
(d) To raise ₹ 6,00,000 by equity shares
₹ 6,00,000 by 10% equity
₹ 8,00,000 by 14% Preference shares
The company is in 60% tax bracket which option is best?

12. The following data is available for ABC Ltd.

₹
Sales 7,50,000
Variable Cost 4,20,000
Fixed Cost 60,000
Debt 4,50,000
Interest on Debt @ 9%
Equity Capital 5,50,000
Calculate ROI, Operating, financial and combined leverage. Also ascertain the level at which EBIT will be
zero.

13. The following details are available :

Existing equity capital – 10,000 shares of ₹ 10 each
Proposals to Raise – ₹ 1,00,000 with following alternatives
(a) Debt at 10%
(b) Equity capital @ ₹ 10 per share
(c) Preference shares of ₹ 10 each @ 12% dividend

EBIT – ₹ 80,000
Tax Rate – 50%
Advise which of the method of financing would be most suitable.
Which is the most optimum proposal of financing?

14. A textile company has EBIT of Rs. 3,20,000. Its capital structure consists of the following securities:
₹
10% Debentures 10,00,000
12% Preference shares 2,00,000
Equity shares of ₹ 100 each 8,00,000
The company is in the 35 percent tax bracket.
a) Determine the EPS
b) Determine the degree of financial leverage

15. A firm has sales of ₹ 5,00,000, variable cost of ₹ 3,50,000 and fixed cost of ₹ 1,00,000 and debt of
₹ 2,50,000 at 10% rate of interest. What is Combined Leverage? If the firm wants to double its EBIT, how
much of a raise in sales would be needed on a percentage basis? [C.U. B.Com. (Hons.)-2006]

16. From the following information of Trends Ltd. calculate the degree of Operating Leverage, Financial
Leverage and Combined Leverage for each situations A and B under financial plans I, II and III. Also
indicate which of the above plans is most risky and which one is least-risky.
Production and Sales 1000 units
Selling price per unit ₹ 20
Variable cost per unit ₹ 15
Fixed cost (Operating) :
Situation — A ₹ 3,000
Situation — B ₹ 4,000
 Sanjib Sharma | 8961676818
Capital Structure :
Plan
I II III
(₹) (₹) (₹)
Equity 7,000 5,000 3,000
10% Debt 3,000 5,000 7,000
10,000 10,000 10,000
[C.U. B.Com. (Hons) 2006]
17. From the following information, compute sales :
DOL-2 ; DFL-3 ; Interest ₹ 3,00,000 and contribution is 40% of sales. [C.U. B.Com. (Hons)-2007]

18. Relevant information about three companies are given below :

BIL PIL MIL
Annual production capacity (units) 1,00,000 1,50,000 2,50,000
Capacity utilisation and sales 75% 75% 75%
Unit Selling Price (₹) 40 50 50
Unit Variable Cost (₹) 15 15 20
Fixed Cost p.a. (₹) 2,00,000 3,00,000 5,00,000
Equity Capital (₹) 5,00,000 7,00,000 10,00,000
[1000 shares for each company]
10% Preference Share Capital (₹) --- 50,000 1,00,000
15% Debentures (₹) 1,00,000 2,00,000 3,00,000
Calculate Operating Leverage, Financial Leverage, Combined Leverage and EPS of these three companies
and comment. [C.U. B.Com. (Hons.)—2008]

19. The following information have been taken from the Income Statement of X Ltd. :
Fixed operating expenses ₹ 1,200
Fixed financial charges ₹ 600
Earning before tax ₹ 400
Calculate percentage of change in EPS, if sales increase by 10% per cent. [C.U. B.Com. (Hons.)-2010]

20. The capital structure of Moon Ltd. is given below :

₹ (in Lakh)
Equity Share Capital (₹ 10 each per share) 10.00
Retained earnings 6.00
10% Preference Share Capital 4.00
20.00
The firm has planned to undertake an expansion scheme of 110,00,000 which can be financed (i) entirely
by issue of equity shares of ₹ 10 each, or (ii) by issue of 12% Debentures of ₹ 100 each at par.
As a result of expansion, sales and operating fixed cost will increase by 60% and 75% respectively.
The other relevant information are given below :
Sales ₹ 50,00,000
Variable Cost 60%
Operating Fixed Cost ₹ 5,00,000
Corporate Tax 40%
Calculate Leverage and EPS before and after expansion and give your opinion for taking appropriate
decision with respect to financing. [C.U. B.Com.(H) – 2010]

21. Which of the following financial plans would you recommend and why?
Particulars Equity Plan Equity Preference Plan Equity Debt Plan
Earning per share ₹ 9.50 ₹8 ₹ 11.25
Price-earning Ratio 20 17 16
[CU. B.Com. (Hons.)-2010]
 Sanjib Sharma | 8961676818
22. A multi-product company has the following costs and output data for the year 2023-2024 :
Product
X Y Z Total
Sales mix 40% 35% 25 %
Unit selling price (₹) 20 25 30
Variable cost per unit (₹) 10 15 18
Fixed cost (₹) 1,50,000
Sales (₹) 5,00,000
Find out break-even point of sales. [C.U. B.Com. (Hons.) — 2010]

23. Malancha Plast Ltd. provides you the following information:

Capital Gearing Ratio : 3
Fixed Cost : 1⁄3rd of total operating cost
Dividend Yield : 6%
Operating Ratio : 75%
Ratio of 18% Preference Shares to 15% Debentures : 12.5%
Dividend Payment Ratio : 30%
Accumulated Reserves : ₹ 4,00,000
Capital Employed : ₹ 24,00,000
Market Price of an Equity Share ₹ 10 : ₹ 135
Tax Rate : 40%
Prepare an Income Statement and calculate the degree of operating leverage, financial leverage and
combined leverage. [C.U. B.Com. (Hons.)-2011]

24. Consider the following information for S Ltd :

₹ in lakhs
EBIT 1,120
EBT 320
Fixed cost 700
Calculate the percentage changes in EPS for increase in sales by 5%. [C.U. B.Com. (Hons.)-2012]
25. Given the following information—
Sales (10,000 units) ₹ 10,00,000
Variable cost per unit ₹ 60
Interest ₹ 1,00,000
EBT ₹ 2,00,000
DCL 2.5
Calculate Operating Leverage and Financial Leverage. [C.U. B.Com. (Hons.)-2012]

26. Anurup Ltd. has Equity shares capital of ₹ 5,00,000 dividend into shares of ₹ 100 each. It wishes to raise
₹ 3,00,000 for expansion-cum-modernisation scheme. The company plans the following financing
alternatives:
(i) By issuing Equity shares of ₹ 100 each.
(ii) ₹ 1,00,000 by issuing Equity shares of ₹ 100 each and 12,00,000 through issue of 10%
Debentures.
(iii) By raising loan at 10% per annum.
(iv) ₹ 1,00,000 by Equity shares of t 100 each and ₹ 2,00,000 by issuing 8% Preference shares of
₹ 100 each.
You are required, to suggest the best alternative giving you comment assuming that the estimated
earning before interest and taxes (EBIT) after expansion ₹ 1,50,000 and Corporate rate of tax is 35%.
[C.U. B.Com. (Hons.)-2013]

27. A company has the choice of issuing 10% debentures or ₹ 100 equity shares to raise ₹ 20 lakh to meet its
long-term investment requirements. Its current capital structure consists of 20000 ordinary shares of
₹ 100 each, 8% debentures of ₹ 10,00,000 and 12% preference shares of ₹ 10,00,000. Determine the
level of EBIT at which EPS would be the same, whether the new funds are acquired by issuing ordinary
shares or by issuing 10% debentures. Tax rate is assumed to be 50%. (Ignore dividend distribution tax.)
Also construct EBIT - EPS chart assuming various level of EBIT. [C. U. B. Com. (Hons.)—2014]
 Sanjib Sharma | 8961676818
28. If the combined leverage and operating leverage of a company are 2.5 and 1.25 respectively, find the
financial leverage and P/V ratio, given that the equity dividend per share is ₹ 2, interest per year is ₹ 2
lakhs, total fixed cost ₹ 1 lakh and sales ₹ 20 lakhs. [C.U.B.Com. (Hons.)-2015]

29. Zica Ltd provides you the following information:

Capital structure : 12% Debenture ? 2,00,000; 9% Preference Share Capital ₹ 3,00,000 and 4,000 Equity
Shares of ₹ 100 each.
Revenue and operating cost details : Sales 3,000 units @ 600 p.u.; Variable Operating Cost p.u. ₹ 350;
Fixed Operating cost ₹ 3,20,000.
Corporate Income Tax rate and Dividend Distribution Tax rate may be assumed at 30% and 10%
respectively.
Calculate DOL, DFL and DCL of Zica Ltd. Using the concept of leverage, find the percentage change in EPS
when sales increase by 10%. [C.U. B.Com. (Hons.) – 2016]

30. X. Ltd is considering two alternative financial plans. Following information relates to these plans:
Plan-A Plan-B
Equity Share (₹ 10 each) (₹) 2,00,000 1,00,000
12% Debenture (₹) — 1,00,000
Profit after tax (₹) 28,000 19,600
Price-Earning ratio 11 7.5
Which of the plans is preferable considering the wealth maximization objective?
[C.U. B.Com. (Hons.) - 2016]

31. The following details of P Ltd. for the year ended 31.3.2025 are furnished:
Operating leverage 3:1
Financial leverage 2:1
Interest charges per annum ₹ 20 lakhs
Corporate tax rate 50%
Variable cost as percentage on sales 60%.
Prepare the Income Statement of the company. [C.U.B.Com. (Hons.)-2017]

32. Calculate different kinds of leverage from the following information of XYZ company :
Production and sales 1,600 units
Selling price per unit ₹ 30
Variable cost per unit ₹ 20
Fixed operating costs :
Situation - A ₹ 4,000
Situation - B ₹ 2,000
Situation - C ₹ 6,000
Financial alternative :
Plan
I II III
Equity ₹ 15,000 ₹ 10,000 ₹ 5,000
Debt carrying 10% interest ₹ 5,000 ₹ 10,000 ₹ 15,000
[C.U.B.Com. (hons.)-2018]

33. The selected financial data for two companies X and Y for the year ended March, 2021 are as follows:
Particulars X Y
Variable expenses as a percentage of sales 75 50
Interest (₹ in lakhs) 300 1,000
Degree of operating leverage 6 2
Degree of financial leverage 4 2
Income tax rate 0.35 0.35
(a) Prepare Income Statements for 'X' and ‘Y
(b) Comment on the financial position of the companies. [C.U.B.Com. (Hons.)-2019]
 Sanjib Sharma | 8961676818
34. The selected financial data for companies. A and B for the current year ended March 31, 2024 are as
follows:
Particulars Company A Company B
Variable cost as a percentage of sales 60 75
Interest (₹) 500 800
Degree of operating leverage 4 5
Degree of financial leverage 2 0.30
Income tax rate 0.30
(a) Prepare income statement of Company A and Company B.
(b) Comment on the risks of the two firms. [C.U.B.Com. (Hons.)-2022]

35. From the following information, calculate (i) different types of leverage and (ii) determine the likely level
of EBIT if EPS is ₹5
₹
10000 Equity share capital 10 each 1,00,000
10% Debentures 2,00,000
Retained earnings 80,000
Fixed assets 4,00,000
Current liabilities 1,00,000
Current assets 80,000
Company's total assets turnover is 3, its fixed operating costs are 2,50,000. The contribution is 60% and
the income tax rate is 35%.