Answer 1: Introduction:

Profits before interest and taxes (EBIT), formerly known as earnings before interest and taxes
(EBIT), is a financial metric that is used to determine a company's profitability. Profits before
interest and taxes (EBIT) is an abbreviation that stands for earnings before interest and taxes. It
is a colloquial word that refers to earnings made before taxes are taken into consideration. For
the purpose of calculating costs, all revenue, including interest and taxes, must be subtracted
from all expenditures. 'EBIT' is an acronym for earnings before interest and taxes, which stands
for profits before interest and taxes. Additionally, the words "profit before interest and taxes" and
"operational profit" may be used to describe this kind of profit. 'EBIT' is an acronym for earnings
before interest and taxes, which stands for profits before interest and taxes. It is the amount of
money a corporation makes after deducting expenses such as interest and taxes. If you are just
concerned with the core operations of the company, you may choose to use the EBITDA method
of accounting to analyse those activities. The term "running income" in the business sector refers
to earnings before interest, taxes, and amortisation that are not included in the calculation of
EBIT.

Even in the best of circumstances, EBITDA and operating income are subject to fluctuations. A
corporation that maintains regular operational expenses will always have a competitive
advantage in the marketplace, regardless of the amount of output. These ongoing expenses must
be addressed regardless of whether or not money are available since they are unrelated to the sale
of products and must be met regardless of whether or not funds are available. Running leverage
refers to a company's ability to increase operational expenses in order to magnify the impact of
increases in sales on profits before interest and taxes before interest and taxes. To generate the
necessary finances for the project, it may be necessary to use a mix of debt and equity financing.

Concepts and Application

The agency's financial leverage, operational leverage, and total leverage are all influenced by a
variety of circumstances.

Financial leverage and operational leverage are two variables that may be used to evaluate a
company's financial health. When discussing the structure of an organization's expenditures,
"working leverage" is used. The breakeven point of a business is calculated using this method
since it accounts for both fixed and variable production costs. In this sense, the term "leverage"
refers to the amount of debt a corporation needs to operate.

Particulars Rs.

Revenues 15,000,000
Less: Variable Cost (WN1) (12,00,000)
Gross Profit 13,800,000

Less: Fixed Cost (48,00,000)

Earnings before Interest & Tax 9,000,000

Less: Interest Cost (WN2) (76,000)

Earnings Before Tax 8,924,000

Less: Tax @ 25% (WN3) (2,231,000)

Earnings After Tax 66,93,000

Working Notes:

1. Variable cost = 8% of the revenue

Variable cost = 8% of 15,000,000
Variable cost = Rs. 12,00,000

2. Interest cost = Interest paid on debenture

9.5% coupon rate on debenture of 8,00,000
Interest cost = 9.5% of 8,00,000
Interest cost = Rs. 76,000

3. Tax to be paid at 25%

25% of 8,924,000
Tax = 2,231,000

Operating Leverage = Sales – Variable Cost / Earnings Before Interest & Tax

Operating Leverage = 13,800,000 / 9,000,000

Operating Leverage = 1.53 times

Financial Leverage = Earnings Before Interest & Tax / Earnings Before Tax

Financial Leverage = 9,000,000 / 8,924,000

Financial Leverage = 1.00 times

Combined Leverage = Operating Leverage * Financial Leverage

Combined Leverage = 1.53 * 1.00

Combined Leverage = 1.53 times

(b) Determining the likely level of EBIT for EPS of (i) Rs.20, (ii) Rs.30, and(iii) Rs. 45.

Profit is divided by the number of shares of common stock that are still outstanding in order to
calculate a company's net income based on the percentage of its common stock that is still
outstanding (EPS). In order to assess the profitability of a marketing business, the following
formula should be used. For most organisations, quarterly profits per share (EPS), which are
adjusted for unforeseen occurrences and dilution of capacity, is the traditional way of reporting
results. When an agency's earnings per share (EPS) exceeds its revenue, their miles concept is
more profitable. Profits earned online are expressed as a proportion of the total number of
common stocks issued. When it comes to calculating profits per share, it's important to be
accurate (EPS). When determining the value of a company, one method is to examine its
earnings per share (EPS), which indicates how much money the company earns for each share of
its inventory it owns. The value of a company's stock increases when shareholders believe that
the company's profits outweigh the value of its stock price; hence, higher earnings per share
(EPS) signifies more value for shareholders. An estimate of EPS may be calculated in a variety
of ways, such by eliminating unusual or interrupted activities from the calculation, or by using a
diluted foundation, among other approaches.

Particulars Rs.

Revenues 15,000,000
Less: Variable Cost (WN1) (12,00,000)

Gross Profit 13,800,000

Less: Fixed Cost (48,00,000)

Earnings before Interest & Tax 9,000,000

Less: Interest Cost (WN2) (76,000)

Earnings Before Tax 8,924,000

Less: Tax @ 25% (WN3) (2,231,000)

Earnings After Tax 66,93,000

For the give case, Earning Per Share = Earnings after tax / No. of shares

No of shares = 10, 00,000 / 10 = 1,00,000

EPS = 66, 93,000 / 1,00,000

EPS = 66.93 per share.

(i) Calculation of EBIT when EPS is 20

EBIT =
{(EPS * No. of shares outstanding) + Preferred Share Dividend} / (1 – Tax Rate) +
Debt Interest

EBIT =
{(20 * 1,00,000) + 0} / (1 – 0.25) + 76,000

EBIT = 27, 42,666.67

(ii) Calculation of EBIT when EPS is 30

EBIT =
{(EPS * No. of shares outstanding) + Preferred Share Dividend} / (1 – Tax Rate) +
Debt Interest

EBIT =
{(30 * 1, 00,000) + 0} / (1 – 0.25) + 76,000

EBIT = 40, 76,000

(iii) Calculation of EBIT when EPS is 45

EBIT =
 {(EPS * No. of shares outstanding) + Preferred Share Dividend} / (1 – Tax Rate) +
Debt Interest

EBIT =
{(45 * 1, 00,000) + 0} / (1 – 0.25) + 76,000

EBIT = 60, 76,000

Conclusion:

Following this logic, we may infer that financial leverage is concerned with the financial risk of
the corporation whereas operational leverage is concerned with the economic sustainability of
the organisation. As an alternative, individuals who believe in the "overall probability" of an
organization's success are referred to as "optimists." A corporation may be able to capture the
whole of its risk by using the "mixed leverage" strategy.

Answer 2

It is the payout provided by a corporation to its shareholders as a return for their investment in
the firm. A company that generates money or makes a profit may choose to distribute a portion
of that money to its shareholders as dividends. Immediately after the payment of the first
dividend, the leftover cash is reinvested back into the business. When assessing the market value
of a firm, the Gordon's growth model (GGM) is used. As time progresses, the number of
payments will continue to climb in an unabated manner. When giving dividend speeches, it is
customary to follow this well-known and often used format (DDM). A constant dividend rate is
assumed in this case, and GGM calculates the present value of an infinite number of future
dividend payments using the present value of an infinite number of future dividend payments.
Many firms that have had regular increases in dividends per share utilise the term "consistent
dividend per share growth" in recognition of the negative connotation that the word carries. The
Gordon boom model (GGM) forecasts that whenever a company's stock is analysed, the stock
will trade and dividends will grow as a result of the analysis. If the GGM is utilised instead,
rewards are postponed indefinitely by an infinite number of percentage points, until the current
period's target return price has been exhausted. A theory of discounted dividends, which is a
logical extension of dividend discount theory, may be characterised as follows: (DDM). Because
of the GGM's concept of regular dividend increases, it is an excellent investment for companies
that have had consistent growth over time.

Concept and Application:

If the company's joint stock owners' costs continue to climb, it is possible that the company's
growth strategy may be altered. The DPS, the dividend increase charge, and the return on
investment (RRR) are three of the most critical factors in the simulation (RoR). Generally
speaking, if the model's cost is less expensive than the current market price of the shares, the
inventory is considered to be inexpensive and should be purchased; conversely, if the model's
cost is more expensive than the current market price of the shares, the inventory is considered to
be expensive and should be avoided.

Distribution of annual dividends paid to the company's joint equity owners as a percentage of
sales is made to the joint equity owners. The yearly percentage rise in dividends is referred to as
the dividend growth rate. In order to grasp the significance of a company's return charge, which
is the interest rate at which investors are prepared to invest in its shares, they must first
understand what it is and what it is not. It may be computed in a number of different ways.
According to the GGM hypothesis, as long as a firm is successful, it has the ability to pay
dividends that are proportionate to its size. It was decided on the time travel cost when
evaluating a corporation using an endless series of proportionate dividends discounted back to
the present using a defined time travel cost.

It is difficult to apply Gordon's growth model to the real world since it is predicated on the
premise that dividend increases are proportional at constant prices, which is not always the case.
As a result of economic cycles and the possibility of unanticipated economic gains or losses,
corporations seldom increase dividends on a consistent basis. It is most appropriate for
businesses that are experiencing considerable growth as a consequence of the expansion.

It's also necessary to look at the relationship between the discounting problem and the model's
growing operating expenses. The fees associated with pooling agreements are unintelligible. It is
possible to set the return charge to rise at the same pace as the original charge. To summarise, if
the needed rate of return is smaller than the rise in the price of a share of stock, then this version
is completely worthless. This is shown by the following example.

Because there is no new debt or inventory, all investments are backed by retained profits, which
operate as a type of collateral. All profits are reinvested or distributed in the current fiscal year,
and capital costs (k) and internal rates of return (r) remain constant in this scenario. In order for
shareholders to receive profits and dividends, earnings and dividends must be generated at this
moment. To get the desired results, make necessary adjustments to the E and D variables in the
model. For the purposes of calculating a result, it is assumed that the values of E and D are both
constant. The company's long-term viability is being called into doubt right now.

In this particular instance, the share price of the firm is now at Rs. 450 per share.

In other words, the price-to-earnings ratio is 15.

DO Corporation has declared a dividend of Rs. 9 per share on its common stock.

This year's payout is predicted to increase by 6 percent over the previous year.
Equity, to put it another way, costs you 15 percent of your net worth.

As a result, the dividend (D1) for the next year would be Rs. 9.54, which is equal to 9 + (9 * 6
percent) = Rs. 9.54.

Even if a share's market value is equivalent to 106 dollars, its intrinsic worth is 9.54 dollars (15
percent – 6 percent).

The stock's current market value is around 92.17 cents.

In contrast to this, consumers have a set return rate of: My chances of winning are just 13
percent.

Because the intrinsic value of the shares is $ 159, according to this model, declaring a dividend
would result in a rise in the stock price in this situation.

(iii) 15% of the population is considered to be a minority

Because of the dividend announcement, stock charges will increase, resulting in an intrinsic
value of 106 for the shares.

18% of the total population is represented by this figure. For example, if inventory prices rise,
the declaration of dividends will result in an increase in the intrinsic value of 79.50 percent,
which will be realised by the announcement of dividends.

Conclusion:

It is used to evaluate the fair worth of a company in all market circumstances, taking into account
both dividend distribution problems and predicted market returns. In situations when the GGM
value of a firm is greater than the current market price, it is a solid investment strategy to
purchase the shares at a discount. When the price of inflated inventory is much lower than the
market worth of the inventory, it becomes important to sell the inventory.

Answer 3a

Introduction

The amount provided on a replenishment purchase order in order to maximise universal stock
savings is referred to as the order quantity (EOQ). The production of a purchase order and
delivery to the supplier occurs when the inventory level reaches the level that requires
replenishment. It is anticipated that the EOQ would result in cost reductions in the areas of
procurement (including volume discounts), stock management, and order processing, among
others. Additionally, optimising order quantity is critical in conjunction with inventory safety
optimization, which involves the establishment of an optimal reorder point for high-quality
commodities.
Concept and Application:

This strategy aims to maximise the trade-off between ordering costs, which can be loosely
characterised as a flat price compatible with order, and stock sustaining value by using
fundamental EOQ (see the Wilson formula section below). The 1913 formula is still valid today,
however we do not advocate that it be utilised in any modern supply chain system because of the
intricacy of the equation. It is just erroneous at the moment when the key mathematical
assumptions that underpin the technique are made. According to the historical formula, the order
price is the most significant factor in determining the operation of the company's operations. As
shown by the appointment of a regiment of clerks to maintain the records in 1913, it was evident
that it was essential. Even in today's corporate world, inventory management software and
electronic data exchange (EDI) are still necessary tools to have. Consequently, the strategy's so-
called "optimization" is illogical, because it fails to take into consideration any rate savings
realised from bulk purchase.

2AO (Annual Demand Quantity) / H square root

Economic consistency (A)

O - Charges for Ordering and Handling (H)

Annual Demand = 6, 00,000 units

Ordering Cost = Rs. 150

Handling Cost / Carrying Cost = Rs. 12

EOQ = Square root (2 * 6, 00,000 * 150) / 12

Economic Order Quantity = 3872.98 units

A decline in inventory levels to zero, as well as the accomplishment of the reorder threshold for
stock replenishment, are the hallmarks of this phase. As a consequence of the fast replenishment
of items in the warehouse, the inventory stage returns to its original value and the stage is reset.

Reorder Point = Safety Level + (Normal Consumption * Normal Lead Time)

Normal Consumption = 6,00,000 / 300 = 2000 units

Safety Level = 3,872.98

Reorder Point = 3,872.98 + (2,000 * 8)

Reorder point = 19,872.98 units

Answer 3b: Introduction:

Because demand is rising at this time, it is important to replenish the supplies currently on hand
in order to keep up with demand at the present moment (ROP). A corporation should have an
adequate supply of a certain product on hand in case its inventory falls below a predetermined
level and a new shipment from the supplier is necessary. In the industrial sector, an industry-
standard technique for estimating how much to acquire based on projected consumption and a
safety stock is used to decide how much to acquire. In the service sector, a safety stock is used to
determine how much to acquire. The EOQ idea was successful because it was founded on the
incorrect assumption that orders could be placed and executed in a short period of time.

Concept and application:

In the real world, there is no such thing as a circumstance with a zero-lead time constraint. The
time between placing a material order and receiving the material order in question is often
measured in days. This means that there will never be a time when the reorder point is zero, and
if an order is placed before the reorder point is reached, new items will arrive before the
company's special offers are no longer available for purchase. According to the Order Factor
problem, the quantity of inventory that must be maintained or the amount of stock that must be
cleared before a new order can be made are both important factors to consider.

To determine the ideal order point, it is required to take both the delivery time stock and the
safety stock into consideration. In order to avoid shortages caused by variations in demand
during the lead time (the length of time between placing an order and getting desired inventory),
delivery time stock is necessary, whereas safety stock is required to avoid shortages caused by
fluctuations in demand. During the lead time, it is necessary to have inventory on hand (the time
period between placing an order and receiving desired inventory).

As a result, the reorder point is equal to the sum of regular intake and safety stock that was
consumed during the lead time period.

The order price is decreased by 20%, the carrying cost per unit of stock is discounted by 10%,
and the order wait time is cut by 25% in this situation.

Annual Demand = 6,00,000 units

Ordering Cost = Rs. 150 – (150 * 20%) = 120

Handling Cost / Carrying Cost = Rs. 12 – (12 * 10%) = 10.80

EOQ = Square root (2 * 6, 00,000 * 120) / 10.80

Economic Order Quantity = 3651.48 units

Reorder Point = Safety Level + (Normal Consumption * Normal Lead Time)

Lead Time = 8 – (8 * 25%) = 8 – 2 = 6 days

Normal Consumption = 6, 00,000 / 300 = 2000 units

Safety Level = 3,872.98

Reorder Point = 3,872.98 + (2,000 * 6)

Reorder point = 15,872.98 units

Conclusion:

A certain quantity of transit time stock and safety stock must be maintained in order to assure the
continuation of service. The amount of transit time stock and safety stock needed is influenced
by a variety of different criteria. When taken into consideration as expected stock consumption
between the time of purchase and the time of receiving inventory, green inventory replenishment
may be able to assist lessen the need for this kind of stock replacement. The determination of an
acceptable volume of protected inventory required an unmistakable trade-off between the danger
of a stockout, which may lead to consumer unhappiness and sales losses, and the greater
expenses of keeping higher-quality inventory. A product or service's supply time is affected by
the effectiveness of the replenishment mechanism, which may be described in simple terms.