PROFIT AND LOSS STATEMENT

SALES
LESS: OPERATING EXPENSES

OPERATING
LEVERAGE
OPG VARIABLE EXPENSES
OPG FIXED EXPENSES
PBIT

LEVERAG
FINANCI
INTEREST FIN FIXED EXP
PBT

AL

E
TAX
PAT EPS

DOL CONTN/PBIT

DFL PBIT/PAT IF PREF DIVIDEND IS NOT THERE…

PROBLEM 2

X LTD Y LTD Compute the follow

a)Break even point
SALES 400000 400000 b)Sales at the “Ind
VARIABLE COST 280000 200000 c)Degree of Opera
FIXED COST 50000 150000 of Rs.750000, Rs.1
PROFIT 70000 50000 on the trend of the
Both companies deal in similar products and d)Comment on the
operate in similar market conditions.

X LTD Y LTD C

SALES 400000 400000 SALES

VARIABLE COST 280000 200000 VARIABLE COST
CONTRIBUTION 120000 200000 CONTRIBUTION
FIXED COST 50000 150000 FIXED COST
PROFIT 70000 50000 PROFIT**
** IT IS THE PBIT
a PV RATIO 30.0% 50.0% DOL
BEP 166666.6667 300000
D AT INDIFFERENCE POINT T
b Let the Sales at Indifference point be "X" IF THE SALES FALLS BELOW
Then, at Indifference point IF THE SALES IS MORE THA
Profit of X ltd = Profit of Y ltd
0.3X - 50000 = 0.5X -150000
100000= 0.2X
X=500000

PV RATIO 30% 50%

BREAK EVEN POINT 166666.6667 300000

INDIFFERENCE POINT
ASSUMING IP AS "X"
AT IP,
0.3X - 50000 = 0.5X - 150000
 100000=0.2X
X=500000

COMPARATIVE PROFITABILITY

DEG OF OP. LEVERAGE AT INDIFFERENCE POINT

0.3 X MINUS 50000=0.5 X MINUS 150000

0.2 X = 100000
X=500000

In a certain factory, Type A and Type B machines have been designed to produce t
product, but Type A is less automatic than Type B and requires somewhat more lab
PROB 1 operate. Relevant costs are as follows:
Type A
Set up costs (Cost incurred for preparing the 400
machinery for production which is in the nature of FC)

Variable cost per unit 9.9

Which type of machine should be used for processing various sized orders and
also determine the indifference point.
 Let the Indifference point (number of units) be "X"

COST OF MANUFACTURE OF "X" NUMBER OF UNITS USING TYPE A MACHINE

COST OF MANUFACTURE OF "X" NUMBER OF UNITS USING TYPE B MACHINE

AT INDIFFERENCE POINT (NUMBER OF UNITS PRODUCED)

9.90X + 400 = 9.40X + 600

0.5 X = 200

X = 400

IF THE PRODUCTION IS LESS THAN 400 UNITS, TYPE A MACHINE IS PREFERABLE, BECAUSE THE FC IS LESSER.
IF THE PRODUCTION IS MORE THAN 400 UNITS, TYPE B MACHINE IS PREFERABLE BECAUSE THE VC IS LESSER.
AT 400 LEVEL IT WILL NOT MAKE ANY DIFFERENCE WHETHER YOU USE TYPE A OR TYPE B MACHINE.

ADDITIONAL PROBLEM:
X LTD Y LTD Compute the follow
a)Break even point
SALES 3000000 3000000 b)Sales at the “Ind
VARIABLE COST 1800000 1200000 c)Degree of Opera
FIXED COST 300000 800000 of Rs.2000000, Rs.
PROFIT 900000 1000000 on the trend of the
Both companies deal in similar products and d)Comment on the
operate in similar market conditions.

TRY THIS PROBLEM TWO Das SHALL BE GIVEN FOR WHICH YOU HAVE TO GIVE A
THAN" THREE PAGES IN A4 SHEET.
X LTD Y LTD
LET THE SALES AT THE IND POINT BE "X"
SALES 3000000 3000000 IF SO,
VARIABLE COST 1800000 1200000 0.4X - 300000 = 0.6X -800000
CONTRIBUTION 1200000 1800000 500000 = 0.2X
FIXED COST 300000 800000 X=2500000
PBIT 900000 1000000

PV RATIO 40% 60%

BEP 750000 1333333.333
GENERAL EXPLANATION OF THE FOLLOWING STATEMENT:

With fixed costs, the percentage change in profits (due to a change in

volume) is greater than the percentage change in volume.

FIRST YEAR SECOND YEAR

X LTD Y LTD X LTD

SALES 350000 350000 SALES 500000

VARIABLE COST 245000 175000 VARIABLE COST 350000

CONTRIBUTION 105000 175000 CONTRIBUTION 150000

FIXED COST 50000 150000 FIXED COST 50000

PROFIT 55000 25000 PROFIT 100000

Increase in volume 42.9%

Increase in Profit 81.8%

PROBLEM IN WORD FILE:

X LTD Y LTD
FC/C PER UNIT
SALES 500000 500000 FC/PV RATIO
VARIABLE COST 350000 250000
CONTN 150000 250000
PV RATIO 30% 50%
FIXED COST 50000 150000
PROFIT 100000 100000

BEP 166666.6667 300000

IND POINT
IT IS A POINT WHERE THE PROFIT SHALL BE EQUAL FOR
BOTH THE COMPANIES
LET THE IND POINT BE "X". THEN,
0.3X - 50000 = 0.5X -150000
100000 = 0.2 X
X = 500000

PROFITABILITY
IF THE SALES ARE LESS THAN RS.500000/-, ,X LTD SHALL BE
PROFITABLE, BECAUSE THE FIXED COST AND THE BEP ARE LESSER.
IF THE SALES IS MORE THA RS.500000/- , Y LTD SHALL BE
PROFITABLE, BECAUSE THE PV RATIO IS MORE.

DEGREE OF OPERATING LEVERAGE

DOL 1.5 2.5

Compute the following:
a)Break even point
b)Sales at the “Indifference point”
c)Degree of Operating leverage for both the Companies at Sales
of Rs.750000, Rs.1000000 and the “Indifference Point”. Comment
on the trend of the DOL
d)Comment on the comparative profitability of both the Companies

X LTD Y LTD X LTD Y LTD

500000 500000 750000 750000

VARIABLE COST 350000 250000 525000 375000
CONTRIBUTION 150000 250000 225000 375000
FIXED COST 50000 150000 50000 150000
PROFIT** 100000 100000 175000 225000
** IT IS THE PBIT
1.5 2.500 1.286 1.667

AT INDIFFERENCE POINT THE PROFIT OF BOTH THE COMPANIES SHALL BE EQUAL

IF THE SALES FALLS BELOW THE INDIFF PONT, THEN X LTD WILL BE PROFITABLE AS THE FC AND THE BEP ARE LESSER
IF THE SALES IS MORE THAN THE INDIFF PONT, THEN Y LTD WILL BE PROFITABLE AS THE PV RATIO IS MORE
signed to produce the same
somewhat more labour to

Type B Let the quantity produced at Indifference point be X

600 Then, at Indifference pont
Cost of Production of Type A machine = Cost of Production of Type B machine
9.9X + 400 = 9.4X +600
9.4 0.5X = 200
X=400 UNITS

zed orders and

TYPE A MACHINE IS PREFERABLE WHEN THE PRODUCTION IS LESS THAN 400 UNITS
TYPE B MACHINE IS PREFERABLE WHEN THE PRODUCTION IS MORE THAN 400 UNI
 9.90X + 400
9.40X + 600

E THE FC IS LESSER.
SE THE VC IS LESSER.
B MACHINE.

Compute the following:

a)Break even point
b)Sales at the “Indifference point”
c)Degree of Operating leverage for both the Companies at Sales
of Rs.2000000, Rs.4000000 and the “Indifference Point”. Comment
on the trend of the DOL
d)Comment on the comparative profitability of both the Companies

HICH YOU HAVE TO GIVE A WRITE UP OF ABOUT "NOT MORE SINCERELY ATTEMPT THE Das on your own.

X LTD Y LTD X LTD

HE IND POINT BE "X"
SALES 2000000 2000000 2500000
VARIABLE COST 1200000 800000 1500000
CONTRIBUTION 800000 1200000 1000000
FIXED COST 300000 800000 300000
PBIT 500000 400000 700000

DOL 1.6 3 1.42857142857

to a change in

ND YEAR ASSUMPTIONS IN MARGINAL COSTING:

Y LTD

500000 1. THE SELLING PRICE PER UNIT IS SAME ALWAYS

250000
2. VARIABLE COST PER UNIT IS SAME ALWAYS
250000
3. FIXED COST IS ALWAYS CONSTANT
150000
100000

42.9%

300.0%

FC/C PER UNIT BEP IN UNITS

FC/PV RATIO BEP IN VALUE
 X LTD Y LTD

1000000 1000000
700000 500000
300000 500000
50000 150000
250000 350000

1.200 1.429

ARE LESSER
duction of Type B machine

UCTION IS LESS THAN 400 UNITS

UCTION IS MORE THAN 400 UNITS
MPT THE Das on your own.

Y LTD X LTD Y LTD

2500000 4000000 4000000

1000000 2400000 1600000
1500000 1600000 2400000
800000 300000 800000
700000 1300000 1600000

2.14285714286 1.23076923077 1.5

GENERAL DISCUSSION ABOUT FL:
1 DEGREE OF FINANCIAL LEVERAGE

OWNER'S CAPITAL

BANK LOAN

TOTAL INVESTMENT
VARIABLE
EXPECTED PROFIT BEFORE INT AND TAX @ 20%

FIXED IN NATURE BANK INTEREST @ 12%

PROFIT AFTER TAX

% OF PROFIT AVAILABLE FOR OWNER'S CAP

2 SALES 2000000
LESS: OPERATING EXPENSES
OP VARIABLE EXPENSES 400000
OP FIXED EXPENSES 1000000
PBIT 600000
INTEREST FIN FIXE 100000
PBT (TAXABLE PROFIT) 500000
TAX 30% 150000
PAT 350000
DIVIDEND TO P S/H 200000
PROFIT FOR EQUITY 150000

EPS (EARNINGS PER SHARE)

TO BE COVERED IN THE FUTURE CLASSES
INTEREST COVERAGE RATIO
DEBT SERVICE COVERAGE
DEBT EQUITY RATIO

3
EBIT = Earnings before interest and tax 600000
I= Interest 100000
D=Dividend to Preference shareholders 200000
T=Tax rate expressed in decimal points 30%

EBIT 600000
EBIT-I-(D/(1-T)) =600000-100000-(200000/(1-0.3)
214286
 DFL 2.8

COMBINED LEVERAGE

DOL =CONTN/EBIT
DFL =EBIT / [EBIT-I-(D/(1-T))]

COMBINED LEVERAGE = DOL X DFL

4 Earnings per share: EBIT

INT
EPS = [(EBIT-I)(1-T)-PD] / N EBT
Where, TAX
EBIT=Earnings before Interest and Tax EAT
I= Interest PD
T=Tax rate expresses as decimal points EAT & PD
PD=Dividend payable to Preference shareholders and
N=Number of Equity shares No. of ES
EPS

DOL DFL CL

INT COVERAGE

PROBLEM 3:
A Company produces and sells 10,000 shirts. The selling price per shirt is Rs.
500. Variable cost is Rs. 200 per shirt and fixed operating cost is Rs. 25,00,000.
(a)       Calculate operating leverage.
(b)       If sales are up by 10%, then what is the impact on EBIT and DOL?

SALES 5000000
VARIABLE COST -2000000
CONTRIBUTION 3000000
FIXED OPERATING EXPENSES -2500000
EBIT 500000
DOL 6

PROBLEM 4:
A firm’s details are as under: TUTORIAL NOTE: THESE
Sales (@100 per unit) Rs. 24,00,000
Variable Cost 50% SALES
Fixed Cost Rs. 10,00,000 VC
It has borrowed Rs. 10,00,000 @ 10% p.a. and its equity CONTN
share capital is Rs. 10,00,000 (Rs. 100 each) FC
Calculate: EBIT
(a)           Operating Leverage INT
(b)              Financial Leverage EBT
(c)           Combined Leverage TAX
(d)        Earnings Per Share (when the tax rate is 40%) EAT
If the sales increases by Rs. 6,00,000; what will the new EBIT
DOL, DFL, CL and the EPS DOL
DFL
ANOTHER FORMULA FOR DFL: DCL
DFL= % change in EPS / % change in EBIT
EPS Rs.
1000 CR OWNER'S CAPITAL 1000

500 CR BANK LOAN 500

1500 CR TOTAL INVESTMENT 1500

VARIABLE
300 CR EXPECTED PROFIT BEFORE INT AND TAX @ 40% 600

60 CR BANK INTEREST @ 12% 60

240 CR PROFIT AFTER TAX 540

24.0% % OF PROFIT AVAILABLE FOR OWNER'S CAP 54.0%

EQUITY 100000 Shares of Rs.10 each

12% DEB 1000000

EXPECTED RETURNS BY E.S.HOLDERS 15%

RETUEN ON CAPITAL EMPLOYED 20%

RETURNS/PBIT 400000
INTEREST 120000
RETURNS BEFORE TAX AVAILABLE FOR THE E/S/H 280000
TAX 84000
RETURNS AVAILABLE FOR E/SH 196000
EPS (EARNINGS PER SH) Rs. 1.96
 1000000
200000
800000
320000
480000
200000
280000

20000
14

EPS DEBT EQUITY RATIO

NT COVERAGE DEBT SERVICE COVERAGE

RISK AND RETURN

shirt is Rs. ESTIMATION OF WORKING CAPITAL REQUIREMENT
s. 25,00,000.

IT and DOL?

CHANGE
5500000 10%
-2200000
3300000 10%
-2500000 180000
800000 60%
4.125
TUTORIAL NOTE: THESE ARE OPERATING EXPENSES ONLY.

2400000 3000000 25%

1200000 1500000
1200000 1500000 25% 20000 10
1000000 1000000
200000 500000 150%
100000 100000
100000 400000 300%
40000 160000
60000 240000

6 3 c/ebit OPERATING
2 1.25 ebit/ebt FINANCIAL
12 3.75 COMBINED
3.75 c/ebt
6 24 300%
CR

CR

CR

CR 100%

CR

CR

100%

100%
12 26897.78
 PROBLEM: X LTD Y LTD

SALES 400000 400000

VARIABLE COST 240000 160000
FIXED COST 100000 250000
PROFIT 60000 -10000
These are two companies operating in a similar market and dealing with the
same product.

X LTD Y LTD

SALES 400000 400000

VARIABLE COST 240000 160000
CONTRIBUTION 160000 240000
FIXED COST 100000 250000
PROFIT 60000 -10000

e X LTD Y LTD X LTD

SALES 500000 500000 750000

VARIABLE COST 300000 200000 450000
CONTRIBUTION 200000 300000 300000
FIXED COST 100000 250000 100000
PROFIT 100000 50000 200000

DOL 2 6 1.5

Problem 5:
Betatronics Ltd. has the following Balance sheet and Statement of Profit and Loss:
Balance Sheet as on March 31st, 2020
Liabilities Assets
Equity capital Rs.10 per share) 800,000 Net fixed assets 1,000,000
10% Debt 600,000 Current assets 900,000
Retained earnings 350,000
Current liabilities 150,000
Rs. 1900000 Rs. 1900000

Statement of Profit and Loss for the year ending March 31st, 2020
Sales 340,000
Operating Expenses (including Depreciation of Rs.60000) 120,000
EBIT 220,000
 Less: Interest 60,000
Earnings before tax 160,000
Less: Taxes 35% 56,000
Net Earnings (EAT) Rs. 104,000
Determine the degree of operating, financial and combined leverages at the current sales level, if all
operating expenses, other than depreciation, are variable costs.Find out the EPS as well.
If total assets remain at the same level, but sales (i) increase by 20 percent or (ii) decrease by 20
percent, what will be the DOL, DFL, CL and the EPS (earnings per share) at the new sales level?

RATIO ANALYSIS
LIQUIDITY RATIOS (OR)
SHORT TERM SOLVANCY

1 CURRENT RATIO STANDARD IS 2…. AND BANKS ACCEPT ANYTHING MORE THAN 1.33
CURRENT ASSETS / CURRENT LIABILITIES

WHERE CURRENT ASSETS INCLUDES

CASH AND CASH EQUIVALENTS
BANK BALANCES
SHORT TERM INVESTMENTS / MARKETABLE SECURITIES
ACCOUNTS RECEIVABLES SUNDRY DEBTORS AND BILLS RECEIVABLE
INVENTORY
STAFF ADVANCES
PREPAID EXPENSES
CURRENT LIABILITIES
OVERDRAFT / CASH CREDIT
ACCOUNTS PAYABLE SUNDRY CREDITORS AND BP

2 QUICK RATIO/LIQUID RATIO/ACID TEST RATIO

LIQUID ASSETS / CURRENT LIABILITIES

WHERE
LIQUID ASSETS=CA-PREPAID EXPENSES-STAFF ADVANCE
 LEVERAGE RATIOS (OR)
LONG TERM SOLVANCY

1 OPERATING LEVERAGE
2 FINANCIAL LEVERAGE
3 COMBINED LEVERAGE

4 DEBT EQUITY RATIO EXTERNAL FUNDS / INTERNAL FUNDS

5 INTEREST COVERAGE RATIO EBITD / INTEREST

6 DEBT SERVICE COVERAGE RATIO EBITD / **

** INTEREST + [PRINC/(1-TAX RATE)]

ACTIVITY RATIOS OR
TURNOVER RATIOS OR
EFFICIENCY RATIOS
1 STOCK TURNOVER COST OF GOODS SOLD
(IN NUMBER OF TIMES) AVERAGE INVENTORY

80 4
20

2 STOCK VELOCITY 91.25 DAYS 3

SALES ESTIMATED 10000000

3 DEBTORS TURNOVER
(THE NUMBER OF TIMES THE CR SALES IS AVG ACCOUNTS RECEIVABLES
EFFECTED AND COLLECTION IS MADE)

ESTIMATED CASH SALES

THEREFORE ESTIMATED CREDIT SALES

AVERAGE CURRENT ASSETS

DEBTORS VELOCITY OR DEBT COLLECTION PERIOD

CREDITORS TURNOVER

CREDITORS VELOCITY OR DEBT PAYMENT PERIOD

PRFOITABILITY RATIOS:

GROSS PROFIT RATIO

NET PROFIT RATIO

OPERATING RATIO

EXPENSES RATIOS
COMPUTE THE FOLLOWING:
a PV Ratio
b Break Even Point
c Indifference Point
d Comment on the Comparative profitability of both the Companies
e Compute and compare the following:
Operating Leverage at sales of Rs.500000
Operating Leverage at the Indifference point
Operating Leverage at sales of Rs.1000000

a PV Ratio 40% 60%

b BEP 250000 416666.7
c Let Indifference point be X
Therefore, at indifference point 0.4X - 100000 = 0.6X -250000
150000 = 0.2X
X=750000
d X ltd shall be profitable if the sales is less than Rs.750000/- as the FC and the BEP are lesser
Y ltd shall be profitable when the sales is more than Rs.750000 as the PV ratio is more.

Y LTD X LTD Y LTD

750000 1000000 1000000

300000 600000 400000
450000 400000 600000
250000 100000 250000
200000 300000 350000

2.25 1.333333 1.714286

Given
Level +20% -20%
Sales 340,000 408000 20.00% 272000
VC 17.647% 60000 72000 48000
Contn 280,000 336,000 20.00% 224,000 ANOTHER FORMULA FOR
FC(Depn) 60000 60000 60000 DFL= % change in EPS /
EBIT 220,000 276,000 25.4545% 164,000
Less: Interest 60,000 60,000 60,000 1.38
Earnings before tax 160,000 216,000 35.00% 104,000
Less: Taxes 56,000 75,600 36,400
 Net Earnings (EAT) 104,000 140,400 35.00% 67,600

DOL No. of time 1.27 1.22 1.37

DFL No. of time 1.38 1.28 1.58
CL No. of time 1.75 1.56 2.15
EPS Rs. 1.30 1.76 35% 0.85

RISK AND RETURN

T ANYTHING MORE THAN 1.33 ESTIMATION OF WORKING CAPITAL

TABLE SECURITIES
DEBTORS AND BILLS RECEIVABLE

CREDITORS AND BP
TERNAL FUNDS

+ [PRINC/(1-TAX RATE)]

WHERE AVERAGE INVENTORY=AVG OF (OPENING INV AND CL INV) TRADING AC

OP STOCK
WHERE C G S= OP STOCK + PURCH - CL STOCK = SALES MINUS GROSS PROFIT PURCHASES
80 80 GP

GP RATE 0.466667
MONTHS
ESTIMATED AVERAGE STOCK LEVEL
GROSS PROFIT 4666667 CO G SOLD 5333333 AVG INV 1333333

CREDIT SALES WHERE AVG ACCOUNTS RECEIVABLES= (OP ACCOUNTS RECEIVABLE+ CL ACCOUNTS REC
AVG ACCOUNTS RECEIVABLES ACCOUNTS RECEIVABLE= DEBTORS + BR
24 TIMES

20% 2000000
D CREDIT SALES 8000000 AVERAGE AR 333333.3

1766666.66667

0.5 MONTHS 15.20833 DAYS

 X LTD Y LTD X LTD Y LTD X LTD Y LTD

750000 750000 500000 500000 1000000 1000000

450000 300000 300000 200000 600000 400000
100000 250000 100000 250000 100000 250000
200000 200000 100000 50000 300000 350000
1.5 2.25 2 6 1.33 1.71

ER FORMULA FOR DFL:

% change in EPS / % change in EBIT
 TRADING ACCOUNT
10 SALES 150
100 CLO STOCK 30
70
180 180

ABLE+ CL ACCOUNTS RECEIVABLE)/2

 X LTD Y LTD

1500000 1500000
900000 600000
100000 250000
500000 650000
1.20 1.38
Best of Luck Ltd., a profit-making company, has a paid-up capital of
Rs. 100 lakhs consisting of 10 lakhs ordinary shares of Rs. 10 each.
Currently, it is earning an annual pre-tax profit of Rs. 60 lakhs.

The management wants to diversify production and has approved a

project which will cost Rs. 50 lakhs and which is expected to yield a
PBIT of Rs. 40 lakhs per annum. To raise this additional capital, the
following options are under consideration of the management:

(b) To issue 16% non-convertible debentures of Rs. 100 each for the
entire amount; or
(c) To issue equity capital for Rs. 25 lakhs (face value of Rs. 10) and
16% non-convertible debentures for the balance amount. In this case,
the company can issue shares at a premium of Rs. 40 each.

You are required to advise the management as to how the additional

capital can be raised, keeping in mind that the management wants to
maximise the earnings per share to maintain its goodwill. The
company is paying income tax at 50%. Also find out the Total
PBIT at which the indifference point lies, when the options
(b) and (c) only are considered.

PBIT

INTEREST

TAXABLE PROFIT

TAX THEREON

PAT

EQUITY SHARES

EPS

Option b is prefererable as
Indifference Point:

Let X be the PBIT at the Ind

(X-800000)*(1-0.5)
1000000

0.5X -400000
1000000

0.525 X -
 (a) To issue equity capital for the entire additional amount. It
is expected that the new shares (face value of Rs. 10) can be
sold at a premium of Rs. 15; 200000

50000

OPTION a OPTION b OPTION c

10000000 10000000 10000000

0 800000 400000

TAXABLE PROFIT 10000000 9200000 9600000

TAX THEREON 5000000 4600000 4800000

5000000 4600000 4800000

EQUITY SHARES 1200000 1000000 1050000

4.17 4.60 4.57

Option b is prefererable as the EPS is more in that option

Indifference Point:

Let X be the PBIT at the Indifference point

(X-800000)*(1-0.5) = (X-400000)*(1-0.5)
1050000

0.5X -400000 = 0.5X - 200000

1050000

-420000 = 0.5X - 200000

0.025 X = 220000
X = 8800000
 RATIO ANALYSIS
LIQUIDITY RATIOS (OR)
SHORT TERM SOLVANCY

1 CURRENT RATIO STANDARD IS 2…. AND BANKS ACCEPT ANYTHING MORE THAN 1.33
CURRENT ASSETS / CURRENT LIABILITIES

WHERE CURRENT ASSETS INCLUDES

CASH AND CASH EQUIVALENTS
BANK BALANCES
SHORT TERM INVESTMENTS / MARKETABLE SECURITIES
ACCOUNTS RECEIVABSUNDRY DEBTORS AND BILLS RECEIVABLE
INVENTORY
STAFF ADVANCES
PREPAID EXPENSES
CURRENT LIABILITIES
OVERDRAFT / CASH CREDIT
ACCOUNTS PAYABLE SUNDRY CREDITORS AND BP

2 QUICK RATIO/LIQUID RATIO/ACID TEST RATIO

LIQUID ASSETS / CURRENT LIABILITIES

WHERE
LIQUID ASSETS=CA-PREPAID EXPENSES-STAFF ADVANCE

LEVERAGE RATIOS (OR)

LONG TERM SOLVANCY

1 OPERATING LEVERAGE
2 FINANCIAL LEVERAGE
3 COMBINED LEVERAGE

4 DEBT EQUITY RATIO EXTERNAL FUNDS / INTERNAL FUNDS

5 INTEREST COVERAGE RATIO EBITD / INTEREST

6 DEBT SERVICE COVERAGE RATIOEBITD / **

** INTEREST + [PRINC/(1-TAX RATE)]
 ACTIVITY RATIOS OR
TURNOVER RATIOS OR
EFFICIENCY RATIOS
1 STOCK TURNOVER COST OF GOODS SOLD WHERE AVERAGE INVENTORY=AVG OF (OPENING
(IN NUMBER OF TIMES) AVERAGE INVENTORY
WHERE C G S= OP STOCK + PURCH - CL STOCK = SA
80 4 80
20

2 STOCK VELOCITY 91.25 DAYS 3 MONTHS

SALES ESTIMATED 10000000 GROSS PRO 4666667 CO G SOLD

3 DEBTORS TURNOVER CREDIT SALES

(THE NUMBER OF TIMES THE CR SALES IS AVG ACCOUNTS RECEIVABLES
EFFECTED AND COLLECTION IS MADE) Assumption 24 TIMES

ESTIMATED CASH SALES 20% 2000000

THEREFORE ESTIMATED CREDIT SALES 8000000 AVERAGE AR

AVERAGE CURRENT ASSETS 1766667 100000 being assumed as th

It can also be estimated perf

DEBTORS VELOCITY OR DEBT COLLECTION PERIOD 0.5 MONTHS 15.20833

CREDITORS TURNOVER CREDIT PURCHASES ASSUMED AS 7

AVERAGE ACCOUNTS PAYABLE

(OP CREDITORS , OP BP) , (CL CREDITORS AND CL BP)

TAKING A DIFFERENT EXAMPLE,
TOTAL PURCHASES Rs. 2000000/- and CASH PURCHASES ON AN AVERAGE IS 10%
CREDIT PURCHASES, THEREFORE, IS RS.1800000/-

AVERAGE CREDITORS=1800000/7= 257142.9

CREDITORS VELOCITY OR DEBT PAYMENT PERIOD EXPRESSED IN TERMS OF EITHER MONT

52.14286 DAYS

PROFITABILITY RATIOS:

ROI=RETURN ON INVESTMENT WHERE , CAPITAL EMPLOYED

PBIT/CAPITAL EMPLOYED
ADD:
 NET WORTH OR E.SHAREHOL
ADD: PREFERENCE SHARES
SHAREHOLDERS' FUNDS
ADD: LONG TERM LOANS AND DEB
CAPITAL EMPLOYED

GROSS PROFIT RATIO GROSS PROFIT X 100/SALES

MEDICINE IF SOLD BY ITS TECH NAME=G
PARACET CALPOL

NORMALLY USED BY TAX AUTHORITIES

NET PROFIT RATIO NET PROFIT X 100 / SALES SOME AUTHORS CONSIDER, PROFIT AFT

OPERATING RATIO OPERATING EXPENSES X100 WHERE OPERATING EXPENSES= C G S +

SALES

EXPENSES RATIOS C G S X100 O AND A EXP X 100

SALES SALES

MFG EXP X 100 S AND D EXP X 100

SALES SALES
RISK AND RETURN
ESTIMATION OF WORKING CAPITAL
VENTORY=AVG OF (OPENING INV AND CL INV) TRADING ACCOUNT
OP STOCK 10 SALES
OCK + PURCH - CL STOCK = SALES MINUS GROSS PROFIT PURCHASES 100 CLO STOCK
80 GP 70
180
GP RATE 46.67%

ESTIMATED AVERAGE STOCK LEVEL

CO G SOLD 5333333 AVG INV 1333333

WHERE AVG ACCOUNTS RECEIVABLES= (OP ACCOUNTS RECEIVABLE+ CL ACCOUNTS RECEIVABLE)/2

ACCOUNTS RECEIVABLE= DEBTORS + BR

AVERAGE AR 333333.3

100000 being assumed as the average cash and cash equivalents

It can also be estimated perfectly by preparing a Cash Flow Statement

DAYS

ASSUMED AS 7 ACCOUNTS PAYABLE= CREDITORS+BP

AVG ACCOUNTS PAYABLE = AVG(OP ACCOUNTS PAYABLE + CL ACCOUNTS PAYABLE)

AND DIVIDE IT BY 2
SES ON AN AVERAGE IS 10%

D IN TERMS OF EITHER MONTHS OR DAYS

1.714286 MONTHS

WHERE , CAPITAL EMPLOYED IS COMPUTED AS FOLLOWS:

EQ SHARES XXX
RESERVES AND SURPLUS
 P AND L XXX
GEN RESERVE XXX
OTHER RESERVES XXX
NET WORTH OR E.SHAREHOLDERS' FUNDS XXX
PREFERENCE SHARES XXX
SHAREHOLDERS' FUNDS XXX
LONG TERM LOANS AND DEBENTURES XXX
CAPITAL EMPLOYED XXX

E IF SOLD BY ITS TECH NAME=GENERIC MEDICINE

CROCIN

THORS CONSIDER, PROFIT AFTER TAX AS NET PROFIT AND SOME OTHERS CONSIDER, PBIT I.E., THE OPERATING PROFIT

PERATING EXPENSES= C G S + MFG EXP + O AND A EXP + S AND D EXP

SALES 100
CGS
MFG EXP
GP
O AND A
S AND D
NET OPERATING PROFIT
150
30

180
 RATIO ANALYSIS
LIQUIDITY RATIOS (OR)
SHORT TERM SOLVANCY

1 CURRENT RATIO STANDARD IS 2…. AND BANKS ACCEPT ANYTHING MORE THAN 1.33
CURRENT ASSETS / CURRENT LIABILITIES

WHERE CURRENT ASSETS INCLUDE

CASH AND CASH EQUIVALENTS
BANK BALANCES AND MARKETABLE SECURITIES
ACCOUNTS RECEIVABLE SUNDRY DEBTORS AND BR
INVENTORY… RAW MATERIAL / FINISHED GOODS / CONSUMABLE STOR
PREPAID EXPENSES
ADVANCE TO SUPPLIERS
STAFF ADVANCE

CURRENT LIABILITIES
BANK OVERDRAFT OR CASH CREDIT
ACCOUNTS PAYABLE SUNDRY CREDITORS AND BP
OUTSTANDING EXPENSES

2 QUICK RATIO/LIQUID RATIO/ACID TEST RATIO

LIQUID ASSETS / CURRENT LIABILITIES

WHERE
LIQUID ASSETS=CA-PREPAID EXPENSES-STAFF ADVANCE

LEVERAGE RATIOS (OR) LONG TERM SOLVANCY (OR)

STABILITY RATIOS:

1 OPERATING LEVERAGE
2 FINANCIAL LEVERAGE
3 COMBINED LEVERAGE

4 DEBT EQUITY RATIO EXTERNAL FUNDS / INTERNAL FUNDS

5 INTEREST COVERAGE RATIO EBITD / INTEREST

6 DEBT SERVICE COVERAGE RATIO EBITD / **

STANDARD IS 2 ** INTEREST + [PRINC/(1-TAX RATE)]
 ACTIVITY RATIOS OR TURNOVER RATIOS OR EFFICIENCY RATIOS

1 STOCK TURNOVER COST OF GOODS SOLD WHERE AVERAGE INVENTORY=AVG OF

(IN NUMBER OF TIMES) AVERAGE INVENTORY WHERE C G S= OP STOCK + PURCH - CL S
80
80 4 TIMES
20

2 STOCK VELOCITY 91.25 DAYS 3 MONTHS

SALES ESTIMATED 10000000 GROSS PRO 4666667

3 DEBTORS TURNOVER CREDIT SALES

ESSENTIAL RATIOS FOR ESTIMATING THE WORKING CAPITAL

(THE NUMBER OF TIMES THE CR SALES IS AVG ACCOUNTS RECEIVABLES

EFFECTED AND COLLECTION IS MADE) Experience 24 TIMES

ESTIMATED CASH SALES 20% 2000000

THEREFORE ESTIMATED CREDIT SALES 8000000

AVERAGE CURRENT ASSETS 1766667

4 DEBTORS VELOCITY OR DEBT COLLECTION PERIOD 0.5 MONTHS

CREDITORS TURNOVER CREDIT PURCHASES/AVG ACCOUNTS PAYABLE

(NO. OF TIMES)

ANOTHER EXAMPLE: PURCHASES (TOTAL)

AVG CASH PURCHASES
CREDIT PURCHASES

OP CREDITORS
CL CREDITORS

CREDITORS TURNOVER RATIO

CREDITORS VELOCITY OR DEBT PAYMENT PERIOD

ESTIMATED PURCHASES, IF GIVEN AS Rs.

THEN, AVG ACCOUNTS PAYABLE= 1950022

PROFITABILITY RATIOS: %

1 RETURN ON INVESTMENT % PBIT/CAPITAL EMPLOYED PBIT

2 EPS Rs.

3 GROSS PROFIT RATIO % GP/SALES

NET PROFIT RATIO % NP/SALES

OPERATING PROFIT RATIO % PBIT/SALES

OPERATING RATIO % OPERATING EXPENSES / SALES

EXPENSES RATIOS %

CGS RATIO =CGS/SALES

MFG EXP RATIO =MFG EXP/SALES
ADMIN EXP RATIO =OFFICE AND ADMV EXP/SALES
S&D EXP RATIO =S&D EXP/SALES

GENERAL CONCEPTS TO BE STUDIED:

CAPITAL EMPLOYED EQUITY SHARES

ADD RESERVES AND SURPLUS
PROFIT AND LOSS
GENERAL RESERVE
OTHER RESERVES
LESS: DEBIT BALANCES OF
P & L ACCOUNT
PRELIMINARY EXPENSES
EQUITY SHAREHOLDERS' FUNDS=NETWORTH
ADD: PREFERENCE SHARES
SHAREHOLDERS' FUNDS
ADD: LONG TERM BORROWINGS
DEBENTURES
CAPITAL EMPLOYED
 RISK AND RETURN
ORE THAN 1.33 ESTIMATION OF WORKING CAPITAL

ABLE SECURITIES
DEBTORS AND BR
GOODS / CONSUMABLE STORES

CREDITORS AND BP

TUTORIAL NOTE: IN THIS CONTEXT SERVICING MEANS REPAYMENT

+ [PRINC/(1-TAX RATE)]
VERAGE INVENTORY=AVG OF (OPENING INV AND CL INV) TRADING ACCOUNT
G S= OP STOCK + PURCH - CL STOCK = SALES MINUS GROSS PROFIT OP STOCK 10 SALES
80 PURCHASES , EXP 100 CLO STOCK
GP 70
180
GP RATE 46.67%

ESTIMATED AVERAGE STOCK LEVEL

CO G SOLD 5333333 AVG INV 1333333

WHERE AVG ACCOUNTS RECEIVABLES= (OP ACCOUNTS RECEIVABLE+ CL ACCOUNTS RECEIVABLE)/2

ACCOUNTS RECEIVABLE= DEBTORS + BR

AVERAGE AR 333333.3

15.20833 DAYS

AVG ACCOUNTS PAYABLE = AVG ( OP ACCOUNTS PAYABLE + CL ACCOUNTS PAYABLE)

1200000 1400000
ACCOUNTS PAYABLE = CREDITORS+BP
6000000
25%
4500000

1000000 OP BP 200000 OP ACCOUNTS PAYABLE 1200000

900000 CL BP 500000 CL ACCOUNTS PAYABLE 1400000
AVG ACCOUNTS PAYABLE 1300000

3.4615 TIMES

=365/CREDITORS TURNOVER RATIO 105.4456 DAYS

=12/CREDITORS TURNOVER RATIO 3.466705 MONTHS

9000000 AVG CASH PURCHASES 25% CR PURCHASES 6750000

100 CR CE 10000 CR 1%
 GENERIC MEDICINES PARACET=MATACIN=CALPOL=CROCIN

WHERE OPERATING EXPENSES= COST OF GOODS SOLD+ MFG,ADMV, SELLING AND DISTRIBUTION EXPENSES

S=NETWORTH OWNERS' MONEY

 Rs. In lacs
ACCOUNT
150
CLO STOCK 30

180

RECEIVABLE)/2
N EXPENSES
 RATIO ANALYSIS WORKING CAPITAL = CA - CL
LIQUIDITY RATIOS (OR)
SHORT TERM SOLVANCY

1 CURRENT RATIO STANDARD IS 2…. AND BANKS ACCEPT ANYTHING MORE THAN 1.33
CURRENT ASSETS / CURRENT LIABILITIES

WHERE CURRENT ASSETS INCLUDE

CASH AND CASH EQUIVALENTS
BANK BALANCES AND EASILY MARKETABLE SECURITIES
ACCOUNTS RECEIVABLES SUNDRY DEBTORS AND BR
INVENTORIES
PREPAID EXPENSES
STAFF ADVANCE
ADVANCE TO SUPPLIERS

CURRENT LIABILITIES
BANK OVERDRAFT OR CASH CREDIT
ACCOUNTS PAYABLE SUNDRY CREDITORS AND BP
OUTSTANDING EXPENSES

2 QUICK RATIO/LIQUID RATIO/ACID TEST RATIO

LIQUID ASSETS / CURRENT LIABILITIES

WHERE
LIQUID ASSETS=CA-PREPAID EXPENSES-STAFF ADVANCE

LEVERAGE RATIOS (OR) LONG TERM SOLVANCY (OR)

STABILITY RATIOS:

1 OPERATING LEVERAGE
2 FINANCIAL LEVERAGE
3 COMBINED LEVERAGE

4 DEBT EQUITY RATIO EXTERNAL FUNDS / INTERNAL FUNDS

5 INTEREST COVERAGE RATIO EBITD / INTEREST

6 DEBT SERVICE COVERAGE RATIO EBITD / **

STANDARD IS 2 ** INTEREST + [PRINC/(1-TAX RATE)]
 ACTIVITY RATIOS OR TURNOVER RATIOS OR EFFICIENCY RATIOS

1 STOCK TURNOVER COST OF GOODS SOLD WHERE AVERAGE INVENTORY=AVG OF

(IN NUMBER OF TIMES) AVERAGE INVENTORY WHERE C G S= OP STOCK + PURCH - CL S
80
80 4 TIMES
20

2 STOCK VELOCITY 91.25 DAYS 3 MONTHS

SALES ESTIMATED 10000000 GROSS PRO 4666667

3 DEBTORS TURNOVER CREDIT SALES

ESSENTIAL RATIOS FOR ESTIMATING THE WORKING CAPITAL

(THE NUMBER OF TIMES THE CR SALES IS AVG ACCOUNTS RECEIVABLES

EFFECTED AND COLLECTION IS MADE) By Experience 24 TIMES

ESTIMATED CASH SALES 20% 2000000

THEREFORE ESTIMATED CREDIT SALES 8000000

AVERAGE CURRENT ASSETS 1766667 CASH CAN BE COMPUTED BY

4 DEBTORS VELOCITY OR DEBT COLLECTION PERIOD 0.5 MONTHS

CREDITORS TURNOVER CREDIT PURCHASES/AVG ACCOUNTS PAYABLE

(NO. OF TIMES)

ANOTHER EXAMPLE: PURCHASES (TOTAL)

AVG CASH PURCHASES
CREDIT PURCHASES

OP CREDITORS
CL CREDITORS

CREDITORS TURNOVER RATIO

CREDITORS VELOCITY OR DEBT PAYMENT PERIOD

DIFFERENT EXAMPLE
ESTIMATED PURCHASES, IF GIVEN AS Rs.
THEN, AVG ACCOUNTS PAYABLE= 617578.1

PROFITABILITY RATIOS: %

1 RETURN ON INVESTMENT % PBIT X 100 /CAPITAL EMPLOYED

 ROI
2 EPS Rs.

3 GROSS PROFIT RATIO % GP/SALES

NET PROFIT RATIO % NP/SALES

OPERATING PROFIT/SALES

OPERATING RATIO % OPERATING EXPENSES / SALES

EXPENSES RATIOS %

CGS RATIO =CGS/SALES

MFG EXP RATIO =MFG EXP/SALES
ADMIN EXP RATIO =OFFICE AND ADMV EXP/SALES
S&D EXP RATIO =S&D EXP/SALES

GENERAL CONCEPT TO BE STUDIED:

CAPITAL EMPLOYED EQUITY SHARES

ADD RESERVES AND SURPLUS
PROFIT AND LOSS
GENERAL RESERVE
OTHER RESERVES
LESS: DEBIT BALANCES OF
P & L ACCOUNT (DR)
PRELIMINARY EXPENSES
EQUITY SHAREHOLDERS' FUNDS=NETWORTH
ADD: PREFERENCE SHARES
SHAREHOLDERS' FUNDS
ADD: LONG TERM BORROWINGS EITHER FROM BANKS OR FINANCI
DEBENTURES
CAPITAL EMPLOYED
G CAPITAL = CA - CL

RISK AND RETURN

ORE THAN 1.33 ESTIMATION OF WORKING CAPITAL

ARKETABLE SECURITIES
DEBTORS AND BR

CREDITORS AND BP

TUTORIAL NOTE: IN THIS CONTEXT SERVICING MEANS REPAYMENT

EBITD INT PRIN TAX RATE

+ [PRINC/(1-TAX RATE)] 1000000 150000 200000 40%
VERAGE INVENTORY=AVG OF (OPENING INV AND CL INV) TRADING ACCOUNT
G S= OP STOCK + PURCH - CL STOCK = SALES MINUS GROSS PROFIT OP STOCK 10 SALES
80 PURCHASES , EXP 100 CLO STOCK
GP 70
180
GP RATE 46.67%

ESTIMATED AVERAGE STOCK LEVEL

CO G SOLD 5333333 AVG INV 1333333

WHERE AVG ACCOUNTS RECEIVABLES= (OP ACCOUNTS RECEIVABLE+ CL ACCOUNTS RECEIVABLE)/2

ACCOUNTS RECEIVABLE= DEBTORS + BR
DIFFERENT EXAMPLE
OP DRS 30
CL DRS 40
AVERAGE AR 333333.3 OP BR 20
CL BR 5
CASH CAN BE COMPUTED BY PREPARING THE CASH FLOW STATEMENT 95 YOU HAVE TO DIVIDE IT BY 2

15.20833 DAYS

AVG ACCOUNTS PAYABLE = AVG ( OP ACCOUNTS PAYABLE + CL ACCOUNTS PAYABLE)

550000 1000000
ACCOUNTS PAYABLE = CREDITORS+BP
4000000
20%
3200000

250000 OP BP 300000 OP ACCOUNTS PAYABLE 550000

1000000 CL BP 0 CL ACCOUNTS PAYABLE 1000000
AVG ACCOUNTS PAYABLE 775000

4.129032 TIMES

=365/CREDITORS TURNOVER RATIO 88.39844 DAYS

=12/CREDITORS TURNOVER RATIO 2.90625 MONTHS

3000000 AVG CASH PURCHASES 15% CR PURCHASES 2550000

PBIT=OPERATING PROFIT
 GENERIC MEDICINES PARACET=MATACIN=CALPOL=CROCIN
WHICH IS SOLD BY ITS TECH NAME

WHERE OPERATING EXPENSES= COST OF GOODS SOLD+ MFG,ADMV, SELLING AND DISTRIBUTION EXPENSES

S=NETWORTH OWNERS' MONEY

HER FROM BANKS OR FINANCIAL INSTITUTIONS

PRIN / 0.6 DSCR
333333.3 483333.3 2.068966
 Rs. In lacs
ACCOUNT
150
CLO STOCK 30

180

RECEIVABLE)/2

YOU HAVE TO DIVIDE IT BY 2 ONLY

N EXPENSES
 1
A A firm wants to replace an old machine with a new machine. From the
following details decide whether to retain the old machine or replace it with the
new one:
Old machine New Machine
Present book value Rs. 120000 Cost Price Rs.
Estimated rest of the life -5 Years Estimated life 5 years
Probable sale price Rs. 150000 Salvage value Rs.
Annual Cost of operation Rs. 500000 Annual Cost of operation Rs.
Tax rate 40% and Rate of discount 12%

0th year Sale of Old Machine 150000

Profit on Sale 30000
Tax thereon -12000
Cost of New Machine -468892 -330892
End of Year 1
Depreciation-New 73778.4
Depreciation-Old 24000
Tax Savings due to Excess Depn 19911.36
Savings in Cost of Opn 100000
Tax thereon -40000 60000 79911.36
End of Year 2 Cash Flow as in Year 1 79911.36
End of Year 3 Cash Flow as in Year 1 79911.36
End of Year 4 Cash Flow as in Year 1 79911.36
End of Year 5 Cash Flow as in Year 1 79911.36
Salvage value of the New Machine 100000 179911.4
Net Present Value
As the NPV is a POSITIVE figure, it is advisable to implement the project by buying the new machine.

B A firm wants to replace an old machine with a new machine. From the
following details decide whether to retain the old machine or replace it with the
new one:
Old machine New Machine
Present book value Rs. 185000 Cost Price Rs.
Estimated rest of the life -5 Years Estimated life 5 years
Probable sale price Rs. 350000 Salvage value Rs.
Annual Cost of operation Rs. 500000 Annual Cost of operation Rs.
Tax rate 40% and Rate of discount 12%
 0th year Sale of Old Machine 350000
Profit on Sale 165000
Tax thereon -66000
Cost of New Machine -1003342 -719342
End of Year 1
Depreciation-New 140668.4
Depreciation-Old 37000
Tax Savings due to Excess Depn 41467.36
Savings in Cost of Opn 400000
Tax thereon -160000 240000 281467.4
End of Year 2 Cash Flow as in Year 1 281467.4
End of Year 3 Cash Flow as in Year 1 281467.4
End of Year 4 Cash Flow as in Year 1 281467.4
End of Year 5 Cash Flow as in Year 1 281467.36
Salvage value of the New Machine 300000 581467.4
Net Present Value
As the NPV is a POSITIVE figure, it is advisable to implement the project by buying the new machine.

Pentagan ltd., is evaluating a project that has the following Cash flow stream associated with it:
A
Year Cash Flow

0 -95.0
1 -62.0
2 40.0
3 40.0
4 44.0
5 99.1
6 120.0
Cost of capital for Pentagon ltd., is 15%. Compute the MIRR.
Amounts are given in Lakhs of Rupees.

B Pentagan ltd., is evaluating a project that has the following Cash flow stream associated with it:
Year Cash Flow
 0 -400
1 -60
2 100
3 125
4 160
5 200
6 239.5
Cost of capital for Pentagon ltd., is 15%. Compute the MIRR.
Amounts are given in Lakhs of Rupees.

GANESH
FILTERBED ROAD
BALRAM PAAL PANNAI

8870772499
PHONEPEY
DURAIKKANNAN

3
A A firm’s details are given below:
Sales (@100 per unit) Rs. 4,000,000
Variable Operating Expenses 45%
Fixed Operating Expenses 600,000
It has borrowed Rs. 10,00,000 @ 10% p.a. and its equity
share capital is Rs. 10,00,000 (Rs. 100 each)
Calculate:
(a)  Degree of Operating Leverage 1 mark
(b)  Degree of Financial Leverage 1 mark
(c)  Degree of Combined Leverage 1 Mark
(d)  Earnings Per Share (when the tax rate is 40%) 1 Mark
(e) Explain in brief, what % changes will be there in
Contribution, EBIT , EBT, EAT and the EPS, for every 30%
of change in the Sales from the given level of Sales. 6 Marks

B A firm’s details are as under:

Sales (@100 per unit) Rs. 4,800,000
Variable Operating Expenses 55%
Fixed Operating Expenses 608,500
It has borrowed Rs. 10,00,000 @ 10% p.a. and its equity
share capital is Rs. 10,00,000 (Rs. 100 each)
Calculate:
(a)           Operating Leverage 1 mark
(b)              Financial Leverage 1 mark
(c)           Combined Leverage 1 Mark
(d)        Earnings Per Share (when the tax rate is 40%) 1 Mark
(e) Explain in brief, what % changes will be there in
Contribution, EBIT , DOL, DFL and the EPS, for every 30%
of change in the Sales from the given level of Sales. 6 Marks

178
 HINTS AND WORKINGS WITHOUT GIVING A DETAILED ANSWER
WHEREVER ALTERNATIVE WORKINGS ARE GIVEN, ONE IS SUFFICIENT IN THE EXAM

13912.47

468892 13912.47

100000
400000

Factors at
12%

1 -330892

0.8929 71352.85
0.7972 63705.34
0.7118 56880.91
0.6355 50783.67

0.5674 102081.71
13912.47
e new machine.

1003342 465511.54

300000
100000

Factors at
 12%

1 -719342

0.8929 251322.21
0.7972 224385.78
0.7118 200348.47
0.6355 178872.51

0.5674 329924.58
465511.54
he new machine.

associated with it:

PV of the Cash Outflows Year Cash Flow Factors

0 -95 1
1 -62 0.8696

FV of Cash Inflows Year Cash Flow Comp yrs

2 40 4
3 40 3
4 44 2
5 99.1 1
6 120 0

PV of the Cash Outflows = TV / (1+MIRR)^(No. of years)

148.9152 = FV OF CASH INFLOWS /(1+MIRR)^6

(1+MIRR)^6 = 2.840209
(1+MIRR) = 1.190031
MIRR = 19.003%

associated with it:

PV of the Cash Outflows Year Cash Flow Factors
0 -400 1
1 -60 0.8696

FV of Cash Inflows Year Cash Flow Comp yrs

2 100 4
3 125 3
4 160 2
5 200 1
6 239.5 0

PV of the Cash Outflows = TV / (1+MIRR)^(No. of years)

452.176 = FV OF CASH INFLOWS /(1+MIRR)^6

(1+MIRR)^6 = 2.313502
(1+MIRR) = 1.150037
MIRR = 15.004%

SALES 4000000 5200000 30.00%

VC 1800000 2340000
CONTN 2200000 2860000 30.00%
FC 600000 600000
EBIT 1600000 2260000 41.25% 0.4125
INT 100000 100000
EBT 1500000 2160000 44.00% 0.44
TAX 600000 864000
EAT 900000 1296000 44.00%

DOL 1.375 1.2654867257 c/ebit OPERATIN 8%

DFL 1.067 1.0462962963 ebit/ebt FINANCIAL 2%
DCL 1.467 1.3240740741 COMBINED 10%
1.324074074074 c/ebt
EPS Rs. 90.0 129.6 44.00%

SALES 4800000 6240000 30.00%

VC 2640000 3432000
CONTN 2160000 2808000 30.00%
FC 608500 608500
EBIT 1551500 2199500 41.77%
 INT 100000 100000
EBT 1451500 2099500 44.64%
TAX 580600 839800
EAT 870900 1259700 44.64%

DOL 1.3922011 1.276653785 c/ebit OPERATIN 8.30%

DFL 1.06889425 1.0476303882 ebit/ebt FINANCIAL 1.99%
DCL 1.48811574 1.3374613003 COMBINED 10.12%
1.33746130031 c/ebt
EPS Rs. 87.09 125.97 44.64%
tanishq
 DCOF
-95
-53.9152
-148.9152

C.Value
69.9603
60.8350
58.1900
113.9650
120.0000
422.9503

SH INFLOWS /(1+MIRR)^6
 DCOF
-400
-52.176
-452.176

C.Value
174.9006
190.1094
211.6000
230.0000
239.5000
1046.1100

SH INFLOWS /(1+MIRR)^6

ANOTHER FORMULA FOR DFL:

DFL= % change in EPS / % change in EBIT
 EMI-CHECKING 0 EMI-CHECKING
0 0 0 0 120
EMI-CHECKING 0
120
 1
A A firm wants to replace an old machine with a new machine. From the
following details decide whether to retain the old machine or replace it with the
new one:
Old machine New Machine
Present book value Rs. 100000 Cost Price Rs.
Estimated rest of the life -5 Years Estimated life 5 years
Probable sale price Rs. 150000 Salvage value Rs.
Annual Cost of operation Rs. 500000 Annual Cost of operation Rs.
Tax rate 40% and Rate of discount 12%

0th year Sale of Old Machine 150000

Profit on Sale 50000
Tax thereon -20000
Cost of New Machine -499508 -369508
End of Year 1
Depreciation-New 79901.6
Depreciation-Old 20000
Tax Savings due to Excess Depn 23960.64
Savings in Cost of Opn 100000
Tax thereon -40000 60000 83960.64
End of Year 2 Cash Flow as in Year 1 83960.64
End of Year 3 Cash Flow as in Year 1 83960.64
End of Year 4 Cash Flow as in Year 1 83960.64
End of Year 5 Cash Flow as in Year 1 83960.64
Salvage value of the New Machine 100000 183960.6
Net Present Value
As the NPV is a Negetive figure, it is advisable to retain the old Machine.

B A firm wants to replace an old machine with a new machine. From the
following details decide whether to retain the old machine or replace it with the
new one:
Old machine New Machine
Present book value Rs. 250000 Cost Price Rs.
Estimated rest of the life -5 Years Estimated life 5 years
Probable sale price Rs. 350000 Salvage value Rs.
Annual Cost of operation Rs. 500000 Annual Cost of operation Rs.
Tax rate 40% and Rate of discount 12%
 0th year Sale of Old Machine 350000
Profit on Sale 100000
Tax thereon -40000
Cost of New Machine -950957 -640957
End of Year 1
Depreciation-New 130191.4
Depreciation-Old 50000
Tax Savings due to Excess Depn 80191.4 32076.56
Savings in Cost of Opn 400000
Tax thereon -160000 240000 272076.6
End of Year 2 Cash Flow as in Year 1 272076.6
End of Year 3 Cash Flow as in Year 1 272076.6
End of Year 4 Cash Flow as in Year 1 272076.6
End of Year 5 Cash Flow as in Year 1 272076.6
Salvage value of the New Machine 300000 572076.6
Net Present Value
As the NPV is a positive figure, it will be adisable to replace the machine.

Pentagan ltd., is evaluating a project that has the following Cash flow stream associated with it:
A
Year Cash Flow

0 -100
1 -80
2 40
3 40
4 44
5 100
6 120
Cost of capital for Pentagon ltd., is 15%. Compute the MIRR.
Amounts are given in Lakhs of Rupees.

B Pentagan ltd., is evaluating a project that has the following Cash flow stream associated with it:
Year Cash Flow
 0 -150
1 -30
2 40
3 58.7
4 80
5 100
6 120
Cost of capital for Pentagon ltd., is 15%. Compute the MIRR.
Amounts are given in Lakhs of Rupees.

3
A A firm’s details are given below:
Sales (@100 per unit) Rs. 2,600,000
Variable Operating Expenses 45%
Fixed Operating Expenses 330,000
It has borrowed Rs. 10,00,000 @ 10% p.a. and its equity
share capital is Rs. 10,00,000 (Rs. 100 each)
Calculate:
(a)  Degree of Operating Leverage 1 mark
(b)  Degree of Financial Leverage 1 mark
(c)  Degree of Combined Leverage 1 Mark
(d)  Earnings Per Share (when the tax rate is 40%) 1 Mark
(e) Explain in brief, what % changes will be there in
Contribution, EBIT , EBT, EAT and the EPS, for every 30%
of change in the Sales from the given level of Sales. 6 Marks

B A firm’s details are given below:

Sales (@100 per unit) Rs. 3,000,000
Variable Operating Expenses 55%
Fixed Operating Expenses 450,000
It has borrowed Rs. 10,00,000 @ 10% p.a. and its equity
share capital is Rs. 10,00,000 (Rs. 100 each)
Calculate:
(a)  Degree of Operating Leverage 1 mark
(b)  Degree of Financial Leverage 1 mark
(c)  Degree of Combined Leverage 1 Mark
(d)  Earnings Per Share (when the tax rate is 40%) 1 Mark
(e) Explain in brief, what % changes will be there in
Contribution, EBIT , EBT, EAT and the EPS, for every 30%
of change in the Sales from the given level of Sales. 6 Marks
HINTS AND WORKINGS WITHOUT GIVING A DETAILED ANSWER
WHEREVER ALTERNATIVE WORKINGS ARE GIVEN, ONE IS SUFFICIENT IN THE EXAM

-10106.68

499508
COMMENTS ON THE PERFORMANCE (COMMON FOR ALL THREE BATC
100000
400000 GENERALLY, STUDENTS ARE VERY GENEROUS IN COMMITING ARITHME
SWAPPING OF NUMBERS
HUGE NPVs ARRIVED AT
Factors at INSTEAD OF FIVE YEARS, STUDENTS HAVE WORKED OUT FOR 10 YEARS
12% IN SPITE OF SPECIFIC INSTRUCTIONS, BOTH THE SELLING PRICE AND TH
ONE STUDENT HAS ADOPTED A CUT OFF RATE OF 10%

2ND PROBLEM GENERALLY DONE CORRECTLY. ABOUT 60% OF THE STU

1 -369508
3RD PROBLEM
COLUMNAR FORMAT IS SUGGESTED
A FEW HAVE NOT USED IT
FOR THE % CHANGE, SEPARATE MARKS ARE ALLOTTE
READ THE PROBLEM PROPERLY
0.8929 74968.46 ABOUT 25% OF THE STUDENTS HAVE WORKED OUT F
0.7972 66933.42 WITHOUT PROPER WORKINGS, MARKS WILL NOT BE ALLOTTED IN THE
0.7118 59763.18
0.6355 53356.99 AVOID COPYING ADOPTING METHODOLOGIES OF ANY SORT AS IT CAN
PROCESS OF CORRECTION ENVISAGED IN CODE TANTRA
0.5674 104379.27
-10106.68

950957

300000
100000

Factors at
 12%

1 -640957

0.8929 242937.16
0.7972 216899.43
0.7118 193664.10
0.6355 172904.65

0.5674 324596.24
510044.58

am associated with it:

PV of the Cash Outflows Year Cash Flow Factors

0 -100 1
1 -80 0.8696

FV of Cash Inflows Year Cash Flow Comp yrs

2 40 4
3 40 3
4 44 2
5 100 1
6 120 0

PV of the Cash Outflows = TV / (1+MIRR)^(No. of years)

169.568 = FV OF CASH INFLOWS /(1+MIRR)^6

(1+MIRR)^6 = 2.500385
(1+MIRR) = 1.165023
MIRR = 16.502%

am associated with it:

PV of the Cash Outflows Year Cash Flow Factors
0 -150 1
1 -30 0.8696

FV of Cash Inflows Year Cash Flow Comp yrs

2 40 4
3 58.7 3
4 80 2
5 100 1
6 120 0

PV of the Cash Outflows = TV / (1+MIRR)^(No. of years)

176.088 = FV OF CASH INFLOWS /(1+MIRR)^6

(1+MIRR)^6 = 2.839692
(1+MIRR) = 1.189995
MIRR = 19.000%

SALES 2600000 3380000 30.00%

VC 1170000 1521000
CONTN 1430000 1859000 30.00%
FC 330000 330000
EBIT 1100000 1529000 39.00%
INT 100000 100000
EBT 1000000 1429000 42.90%
TAX 400000 571600
EAT 600000 857400 42.90%

DOL 1.300 1.2158 c/ebit OPERATIN 6.47%

DFL 1.100 1.0700 ebit/ebt FINANCIAL 2.73%
DCL 1.430 1.3009 COMBINED 9.03%
1.300909727082 c/ebt
EPS Rs. 60.0 85.74 43%

SALES 3000000 3900000 30.00%

VC 1650000 2145000
CONTN 1350000 1755000 30.00%
FC 450000 450000
EBIT 900000 1305000 45.00%
INT 100000 100000
EBT 800000 1205000 50.63%
TAX 320000 482000
EAT 480000 723000 50.63%

DOL 1.500 1.3448275862 c/ebit OPERATIN 10.34%

DFL 1.125 1.0829875519 ebit/ebt FINANCIAL 3.73%
DCL 1.688 1.4564315353 COMBINED 13.69%
1.45643153527 c/ebt
EPS Rs. 48.0 72.3 50.63%
(COMMON FOR ALL THREE BATCHES)

EROUS IN COMMITING ARITHMETICAL ERRORS

AVE WORKED OUT FOR 10 YEARS

BOTH THE SELLING PRICE AND THE PROFIT ARE CONSIDERED AS INFLOW
FF RATE OF 10%

RECTLY. ABOUT 60% OF THE STUDENTS HAVE GOT 10 ON 10.

T IS SUGGESTED

SEPARATE MARKS ARE ALLOTTED BUT FEW HAVE NOT

PROBLEM PROPERLY
STUDENTS HAVE WORKED OUT FOR +30% AND -30% VARIATION IN SALES
S WILL NOT BE ALLOTTED IN THE FINAL EXAMINATION.

OLOGIES OF ANY SORT AS IT CAN BE VERY EASILY FOUND OUT IN THE

D IN CODE TANTRA
 DCOF
-100 5700
-69.568 5700
-169.568 9500 20900

C.Value gst9 filing 3000

69.9603 wife 5000
60.8350 son 3000
58.1900 projections 3000 14000
115.0000
120.0000 balance 6900
423.9853

SH INFLOWS /(1+MIRR)^6
 DCOF
-150
-26.088
-176.088

C.Value
69.9603
89.2754
105.8000
115.0000
120.0000
500.0356

SH INFLOWS /(1+MIRR)^6

9362687872

ANOTHER FORMULA FOR DFL:

DFL= % change in EPS / % change in EBIT
ANOTHER FORMULA FOR DFL:
DFL= % change in EPS / % change in EBIT
 EMI-CHECKING 0
0 0 0 0
EMI-CHECKING 0
120 120
1
Venture Ltd. has Rs. 32 lakhs available for investment in capital projects. It has the option of making
investment in projects 1,2,3 or 4. Each project is entirely independent and has a useful life of 5 years. The
A expected present value of cash flows from the projects is as follows:

Projects Initial outlay PV of CIF

1 900000 1000000
2 800000 1200000
3 700000 1140000
4 1200000 1800000
TOTAL 3600000 5140000

What are the projects or other investment, the Company should make using the available capital of Rs.32 lakhs and
what will be the NPV if those projects and investment are opted for ? Assume that the cost of capital is 15% and
risk-free interest rate is 12% per annum. Given compounded sum of Re. 1 at 12% in 5 years is Rs. 1.762 and
discount factor of Re. 1 at 15% rate for 5 years is 0.4972.

Initial
Projects PV of CIF RANKING AS
outlay
PI PER PI
1 900000 1000000 111% 3
2 800000 1200000 150% 2
3 700000 1140000 163% 1
4 1200000 1800000 150% 2
3600000

CAPITAL INVT 2700000 500000 1.762 881000 0.4972

We have to opt for Projects 1, 3 and 4, investing RS.2800000/-. The remaining sum of Rs.200000 out of
the total availability of Rs.30 lacs, has to be invested at Risk free interest rate of 12%

The Resulting NPV due to the decision taken thus, is Rs. 1878033

Venture Ltd. has Rs. 50 lakhs available for investment in capital projects. It has the option of making
investment in projects 1,2,3 or 4. Each project is entirely independent and has a useful life of 5 years. The
expected present value of cash flows from the projects is as follows:
B

Projects Initial outlay PV of CIF

 1 1600000 2000000
2 800000 1600000
3 1800000 2500000
4 2200000 2800000
TOTAL 6400000 8900000

What are the projects or other investment, the Company should make using the available capital of Rs.50 lakhs and
what will be the NPV if those projects and investment are opted for ? Assume that the cost of capital is 15% and
risk-free interest rate is 12% per annum. Given compounded sum of Re. 1 at 12% in 5 years is Rs. 1.762 and
discount factor of Re. 1 at 15% rate for 5 years is 0.4972.

Initial
Projects PV of CIF RANKING AS
outlay
PI PER PI
1 1600000 2000000 125% 4
2 800000 1600000 200% 1
3 1800000 2500000 139% 2
4 2200000 2800000 127% 3
6400000

CAPITAL INVT 4800000 200000 1.762 352400 0.4972

We have to opt for Projects 1, 3 and 4, investing RS.2800000/-. The remaining sum of Rs.200000 out of
the total availability of Rs.30 lacs, has to be invested at Risk free interest rate of 12%

The Resulting NPV due to the decision taken thus, is Rs. 2275213

Pentagan ltd., is evaluating a project that has the following Cash flow stream associated with it:
A
Year Cash Flow

0 -153.000
1 -62.000
2 40.000
3 60.000
4 64.000
5 69.000
6 153.410
Cost of capital for Pentagon ltd., is 15%. Compute the MIRR.
Amounts are given in Lakhs of Rupees.
B Pentagan ltd., is evaluating a project that has the following Cash flow stream associated with it:
Year Cash Flow

0 -800.00
1 -350.00
2 400.00
3 420.00
4 300.00
5 400.00
6 228.90
Cost of capital for Pentagon ltd., is 15%. Compute the MIRR.
Amounts are given in Lakhs of Rupees.

3
A A firm’s details are given below:
Sales (@100 per unit) Rs. 4,000,000
Variable Operating Expenses 45%
Fixed Operating Expenses 600,000
It has borrowed Rs. 10,00,000 @ 10% p.a. and its equity
share capital is Rs. 10,00,000 (Rs. 100 each)
Calculate:
(a)  Degree of Operating Leverage 1 mark
(b)  Degree of Financial Leverage 1 mark
(c)  Degree of Combined Leverage 1 Mark
(d)  Earnings Per Share (when the tax rate is 40%) 1 Mark
(e) Explain in brief, what % changes will be there in
Contribution, EBIT , EBT, EAT and the EPS, for every 30%
of change in the Sales from the given level of Sales. 6 Marks
B A firm’s details are as under:
Sales (@100 per unit) Rs. 4,800,000
Variable Operating Expenses 55%
Fixed Operating Expenses 608,500
It has borrowed Rs. 10,00,000 @ 10% p.a. and its equity
share capital is Rs. 10,00,000 (Rs. 100 each)
Calculate:
(a)           Operating Leverage 1 mark
(b)              Financial Leverage 1 mark
(c)           Combined Leverage 1 Mark
(d)        Earnings Per Share (when the tax rate is 40%) 1 Mark
(e) Explain in brief, what % changes will be there in
Contribution, EBIT , DOL, DFL and the EPS, for every 30%
of change in the Sales from the given level of Sales. 6 Marks
 HINTS AND WORKINGS WITHOUT GIVING A DETAILED ANSWER
WHEREVER ALTERNATIVE WORKINGS ARE GIVEN, ONE IS SUFFICIENT IN THE EXAM

option of making
eful life of 5 years. The

capital of Rs.32 lakhs and

of capital is 15% and
s is Rs. 1.762 and

NPV FOR
SELECTED
INVTS NPV
0 4 100000
400000 3 400000
440000 1 440000
600000 2 600000

438033
1878033
of Rs.200000 out of

option of making
eful life of 5 years. The
capital of Rs.50 lakhs and
of capital is 15% and
s is Rs. 1.762 and

NPV FOR
SELECTED
INVTS
0 400000 200000 352468.3
800000
700000
600000 0.497176735 200000 99435.35

175213
2275213
of Rs.200000 out of

iated with it:

PV of the Cash Outflows Year Cash Flow Factors DCOF

0 -153 1 -153
1 -62 0.8696 -53.9152
-206.9152

FV of Cash Inflows Year Cash Flow Comp yrs C.Value

2 40 4 69.9603
3 60 3 91.2525
4 64 2 84.6400
5 69 1 79.3500
6 153.41 0 153.4100
478.6128

PV of the Cash Outflows = TV / (1+MIRR)^(No. of years)

 206.9152 = FV OF CASH INFLOWS /(1+MIRR)^6
(1+MIRR)^6 = 2.313086
(1+MIRR) = 1.150002
MIRR = 15.000%

iated with it:

PV of the Cash Outflows Year Cash Flow Factors DCOF

0 -800 1 -800
1 -350 0.8696 -304.36
-1104.36

FV of Cash Inflows Year Cash Flow Comp yrs C.Value

2 400 4 699.6025
3 420 3 638.7675
4 300 2 396.7500
5 400 1 460.0000
6 228.9 0 228.9000
2424.0200

PV of the Cash Outflows = TV / (1+MIRR)^(No. of years)

1104.36 = FV OF CASH INFLOWS /(1+MIRR)^6

(1+MIRR)^6 = 2.194955
(1+MIRR) = 1.139998
MIRR = 14.000%

SALES 4000000 5200000 30.00%

VC 1800000 2340000
CONTN 2200000 2860000 30.00%
FC 600000 600000
EBIT 1600000 2260000 41.25% 0.4125
INT 100000 100000
EBT 1500000 2160000 44.00% 0.44
TAX 600000 864000
EAT 900000 1296000 44.00%

DOL 1.375 1.2654867257 c/ebit OPERATING ANOTHER FORMULA FOR D

DFL 1.067 1.0462962963 ebit/ebt FINANCIAL DFL= % change in EPS / %
DCL 1.467 1.3240740741 COMBINED
1.324074074074 c/ebt
EPS Rs. 90.0 129.6 44.00%
SALES 4800000 6240000 30.00%
VC 2640000 3432000
CONTN 2160000 2808000 30.00%
FC 608500 608500
EBIT 1551500 2199500 41.77%
INT 100000 100000
EBT 1451500 2099500 44.64%
TAX 580600 839800
EAT 870900 1259700 44.64%

DOL 1.3922011 1.276653785 c/ebit OPERATIN 8.30%

DFL 1.06889425 1.0476303882 ebit/ebt FINANCIAL 1.99%
DCL 1.48811574 1.3374613003 COMBINED 10.12%
1.33746130031 c/ebt
EPS Rs. 87.09 125.97 44.64%
RANKING
AS PER
NPV
4
3
2
1
NOTHER FORMULA FOR DFL:
FL= % change in EPS / % change in EBIT
100 176.2342
0.497177
Problem 2:
Int Repayment Factors
0th year -5000 1

end of yea 5000 1 400 1000 1400 0.9434

4000 2 320 1000 1320 0.89
3000 3 240 1000 1240 0.8396
2000 4 160 1000 1160 0.7921
1000 5 80 1000 1080 0.7473
PRESENT VALUE OF THE INVESTMENT
-5000.0000

1320.7600
1174.8000
1041.1040
918.8360
807.0840
5262.5840