1. A firm has a sale of Rs. 15,00,000, variable cost of Rs.

8,40,000 and fixed

cost of Rs. 1,20,000. It has a debt of Rs. 9,00,000 at 9 percent and equity
of Rs. 11,00,000. Calculate the following;

i) What is the firm’s ROI (Return on Investment)

ii) What are the operating and financial leverage of the firm?
ii) If the sales drop to Rs. 9,00,000 what will be the new EBIT? Verify.

2. X. ltd has estimated that for a new product its break-even point is 20,000
units if the item is sold for Rs. 14 per unit and variable cost Rs. 9 per unit.
Calculate the degree of operating leverage for sales volume 25,000 units
and 30,000 units.

1. Calculate the OL, FL and CL for the following firms and interpret the results;

P Q R
Output (Units) 2,50,000 1,25,000 7,50,000
Fixed Cost (Rs.) 5,00,000 2,50,000 10,00,000
Unit Variable Cost 5 2 7.50
(Rs.)
Unit Selling Price (Rs.) 7.50 7 10
Interest Expenses 75000 25000 -
Net Income Approach

Illustration 7: The expected EBIT of a firm is Rs. 80,000. It has Rs. 2, 00,000 8%
debentures. The equity capitalization rate of the company is 10%.

a) Calculate the value of the firm and over all Capitalization rate according to Net Income
Approach.
b) Calculation of the Value of Firm if Debentures is raised to Rs. 3, 00,000.
Net Operating Income Approach:

Illustration 8: A firm has an EBIT of Rs. 2, 00,000 and belongs to a risk class of 10%. What
is the value of equity capital if it employees 6% debt to the extent of 30%, 40%, 50% of the
total capital fund of Rs. 10, 00,000.
Traditional Approach