CA IPCC Leverage Test

Q 1) Answer the following: (Any 4) 10

1. Explain the following terms: (any 2)
a. Indifference point
b. Financial break even
c. EBIT EBP Analysis
2. Write distinguish between: Business risk and financial risk. (any 2 points)
3. How does financial leverage affect the financial risk?
4. What is the rationale behind the trading on equity?
5. When does the arbitrage process will come an end?
Q 2) ABC Ltd provides you the following information: 16
1. Funds required : Rs 10,00,000
2. Financial plans:
a. Plan I: 100% equity shares of Rs 10, current market price is Rs 26, Floating cost Rs 1per share.
b. Plan II : 40% equity shares of Rs 10 each, Current market price is Rs 21 and floating cost is Rs 1 per
share, 60%, 10% debentures of Rs 100 each.
c. 40% equity shares of Rs 10 each, premium on Market 110%, floating cost per equity share Rs per
share. 40%, 10% debentures of Rs 100 each and 20%, 15% Preference shares of Rs 100 each
d. Tax rate : 40%

Required:
a) Calculate indifference point between: Plan I and II, Plan II and III, Plan I and III.
b) Calculate financial breakeven point for each of the plan.
c) Calculate degree of Operating, financial and combined leverage if fixed cost is Rs 50000,
expected return on capital employed is 20%.
d) Which plan would u recommend?


Q 3) Following details of RST Limited for the year ended on 31
st
march, 2009 are given below: 12
1. Operating leverage
2. Combined leverage
3. Fixed cost (Excluding interest)
4. Sales
5. 12% debentures of Rs 100 each
6. Equity share capital of Rs 10 each
7. Income tax
1.4
2.8
Rs 2.04 lakhs
Rs 30 lakhs
Rs 21,25 lakhs
Rs 17 lakhs
30%
Required:
1. Calculate financial leverage
2. Calculate P/V ratio and EPS
3. If the company belongs to an industry whose assets turnover is 1.5, does it have a high or low asset leverage?

Q 4) Consider the following information of omega Ltd: 2
Information Given (in lakhs) Required to calculate:
EBIT
EBT
Fixed operating cost
15750
7000
1575
1. Percentage change in EPS if sales increase by 5%.
2. Financial leverage.