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  • Leverage: Case 2 Base Case 1

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    Kowshik S
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    1. The degree of operating leverage will increase if sales rise to 350 units or decrease to 250 units, as fixed costs remain the same while contribution changes. EBIT will rise to ₹10,500 if sales increase to 350 units, and fall to ₹7,500 if sales decrease to 250 units. 2. Under Plan I, EPS will be Rs. 500 if earnings are Rs. 50,000 and Rs. 750 if earnings are Rs. 75,000. Under Plan II, EPS will be Rs. 1,250 if earnings are Rs. 125,000. Plan I has higher financial leverage and risk. 3. If sales increase by 5%, EBIT will increase by 5%.

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    LEVERAGE

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    1. The degree of operating leverage will increase if sales rise to 350 units or decrease to 250 units, as fixed costs remain the same while contribution changes. EBIT will rise to ₹10,500 if sales increase to 350 units, and fall to ₹7,500 if sales decrease to 250 units. 2. Under Plan I, EPS will be Rs. 500 if earnings are Rs. 50,000 and Rs. 750 if earnings are Rs. 75,000. Under Plan II, EPS will be Rs. 1,250 if earnings are Rs. 125,000. Plan I has higher financial leverage and risk. 3. If sales increase by 5%, EBIT will increase by 5%.

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    17 views5 pages

    Leverage: Case 2 Base Case 1

    Uploaded by

    Kowshik S
    1. The degree of operating leverage will increase if sales rise to 350 units or decrease to 250 units, as fixed costs remain the same while contribution changes. EBIT will rise to ₹10,500 if sales increase to 350 units, and fall to ₹7,500 if sales decrease to 250 units. 2. Under Plan I, EPS will be Rs. 500 if earnings are Rs. 50,000 and Rs. 750 if earnings are Rs. 75,000. Under Plan II, EPS will be Rs. 1,250 if earnings are Rs. 125,000. Plan I has higher financial leverage and risk. 3. If sales increase by 5%, EBIT will increase by 5%.

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    of 5

    LEVERAGE

    1. A firm sells its products for ₹50 per unit, variable cost of ₹30 per unit and operating cost of ₹5000 per year. Its
    current level of sales is 300 units. Determine the degree of operating leverage. What will happen to EBIT if sales
    change a) rise to 350 unts and b) decrease to 250 units?

    EBIT at various levels of sales


    Case 2 Base Case 1
    Sales in units 300
    Selling price per unit 30
    Sales Revenue 0 9000 0
    Less: Variable Cost
    Contribution 0 9000 0
    Less: Fixed Operating Cost
    Earnings Before Interest and Taxes (EBIT) 0 9000 0
    2. A firm is considering two financial plans with a view to examining their impact on Earnings Per Share (EPS).
    The Total Funds required for investment in assets are ₹500000
    Plan I Plan II
    Debt (Interest @10% p.a) 400000 100000
    Equity Shares (₹10 each) 100000 400000
    Total Finances required 500000 500000
    No. of Equity Shares 10000 40000

    Earnings Before Interest and Taxes are assumed as ₹50000, ₹75000 and ₹125000. Rate of Tax to be taken @50%.
    Comment.
    3. From the following information, calcualte the percentage of change in earnings per share if sales increased
    by 5%

    in ₹ lakhs
    Earnings Before Interest and Taxes 1120
    Profit before tax 320
    Fixed Cost 700
    4. Calculate operating and financial leverage under situations 1 and 2 and financial plans A and B from the
    following information relating to the operation and capital structure of a company. What are the
    combinations of operating and financial leverage which give highest and less value?
    Installed capacity 2000 units
    Annual Production and Sales 50% of installed capacity
    selling price per unit ₹ 20
    Variable cost per unit ₹ 10
    Fixed cost for situation 1 4000
    Fixed cost for situation 2 2000
    Details of Capital Structure Plan A in ₹ Plan B in ₹
    Equity 5000 15000
    Debt(cost10%) 15000 5000
    20000 20000

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