balance sheet is as foilows:

P.18.8 The Well Established Company's most recent

Liabilities Amount Assets

Amount
Equity capital (Rs
10 per share) Rs 60,000 Net fixed assets Rs 1,50,000
10% Long-tem debt Current assets
80,000 50,000
Retained eamings 20,000
Current liabilities
40,000
2,00,000 2,00,000
The company's total assets turnover ratio is 3, its fixed operating costs are Rs 1,00,000 and the variable
operating costs ratio is 40 per cent. The income tax rate is 35
(a) Calculate all the three types of per cent.
leverages.
(b) Determine the likely level of EBIT if EPS is
(i) Re 1, (i) Rs 3, and (iii) Zero.
Solution
Income statement
Sales
Less: Variable costs
Rs 6,00,000
Less: Fixed costs
EBIT 2,40,000
Less: Interest 1,00,000
Earmings before interest 2,60,000
Less: Taxes 8,000
Earnings after taxes 2,52,000
88,200
(a) DOL = Rs6,00,000 2,40,000 1,63,800
= 1.38
Rs 2,60,000
DFL =Rs 2,60,000/Rs 2,52,000 1.03
DCL =
1.38 x 1.03 1.42
 Operating, Financial and Combined Leverage 18.31

(EBIT - Rs 8,000)x 0.65

(EBIT ) (1-t) (ii) Rs 3 =
EPS =-
(b) () N 6,000
(EBIT Rs 8,000) (1-0.35)
Re 1 EBIT =Rs 35,692
6,000
(EBIT - Rs 8,000) x 0.65
Rs 6,000 0.65 EBIT - Rs 5,200 Ciii) O(Zero) =
6,000
EBIT Rs 17,231 EBIT =
Rs 8,000
Confirmation table
EBIT Rs 8,0000 Rs 17,2331 Rs 35,6992
Less: Interest 8,000 8,000 8,000
Eamings after interest Nil 9,231 27,692
Less: Taxes Nil 3,231 9,692
Net income (NI) Nil 6,000 18,000
Number of shares (N) 6,000 6,000
6,000
EPS(NI+N) Zero 3

Working Notes
a5sets turnover ratio, 3 =
Sales/Rs 2,00,000 or Sales =
Rs 6,00,000
P.18 0 A
RQ.18.13 The operating and cost data of ABC Ltd are:

Sales Rs 20,00,000
Variable costs 14,00,000
cent interest on Rs 10,00,000)
Fixed costs 4,00,000 (including 15 per

combined leverage
aiculate its operating, financial and
&

9 N N
 Operating, Financial and Combined Leverage 18.25

Solutdon statement of companies A,

(a) Income state B and C for the current
year, ended March 31
A
B
Pantcuas C
Rs 4,500
Rs 9,600
3,000 Rs 24,000
Less: Vanable

SAHes
costs
7,200 12,000
VC -
EBI 1,200
Sales
Fixed costs (Sal 2,000
Less. 300 10,000
400
200 2,000
300
EBIT
Less:Interest

100 1,000
Eamings b e f o r e t a x e s 100 1,000
35
Less: Taxes
35 350
65
EAT( N e t
income)
65 650

o r k i n go t e s

of the income statement

of th requires data for G) sales
revenue, (i) variable
The
preparation costs and
(a) t i i ) fixed costs.

EBIT
=EBIT
Company B:
DFL
DFL 3, EBIT I
4 EBIT
EBIT Rs 300
Company A
EBIT = Rs 400
EBIT
3 EBIT Rs 200 S-0.75S
6 = Rs 9,600
Rs 400
EBIT Rs 300
VC= 0.75 x Rs 9,600 Rs 7,200
Sales Variable costs (V)
DOL = Company G
EBIT
EBIT
S-0.667S 2
EBIT Rs 1,000
5
Rs 300 EBIT = Rs 2,000

where S= sales = Rs 4,500

S - 0.50S
VC 0.667 x Rs 4,500 Rs 3,000 6 Rs 24,000
Rs 2,000
VC = 0.50 Rs 24,000 Rs 12,000
(b) The financial position of company C can be regarded better than other companies: () It has the least
financial risk as it is has minimum degree of financial leverage. It is true that there will be a more
magnified impact on EPS of A and B due to change in EBIT, but, their EBIT level due to low sales is
very low. (tü) From the point of view of DCL, company C is better placed. The degree of combined
leverage is maximum in company B (24); for company A (15) and for company Cit is 4. The total risk

usiness plus financial) of company C is the lowest. (ii) The ability of the company C to meet interest
l1ability is better. The EBIT/interest ratios for the three companies are:
C 2.0 (Rs 2,000Rs
1,000)
B, 15 (Rs 300Rs 200)
A, 1.33 (Rs 400 Rs 300)
P10
 SP6.3 Calculate the
operating leverage, financial leverage, and combined leverage from the fol.
lowing data under Situation I and II and Financial Plan A and B:
Installed Capacity 4,000 Units
Actual Production and Sales 75% of the Capacity
Selling Price 30 per Unit
Variable Cost R15 per Unit
Fixed Cost:
Under Situation I T15,000
Under Situation III 20,000
Capital Structure
Financial Plan
A B

Equity 10,000 15,000

Debt (Rate of Interest at 20%) 10,000 5,000
20,000 20,000 (CA:May 1996)
SP6.1 The following figures relate to two companies:
in Lakh)
PLid. QLtd
Sales 500
Variable costs 1,000
200 300
Contribution 300
Fixed Costs 700
150
Earnings before interest and tax 400
150
Interest 50
300
Profit before tax 100
100
You are required to: 200
(1) Calculate the operating, financial, and combined leverage for the two
(2) Comment on the relative risk position of them. companies: and
(CA: May 1992)
 gtu 8C Unan B.
Consider the ollowing information for
nptoben
14.4

Kaunark
Rs in lakh

EBIT
1,120
PBT 320
Fixed cost 700

alculate percentage change in earnings per share if sales

by > per cent.
Tased
olution:

(a) Degree of operating leverage

_Contribution EBIT +Fixed Cost
DOL = EBIT
EBIT
-1,120 +700
=1.625
1,120

(b) Degree of financial leverage

EBIT 11203.5
DFL= 320
PBT

c) Degree of combined leverage

3.5=5.6875
DFL=1.625x
DCL =DOLx
DLcan also be found out as:
EPS
Change in
DCL=%
DCL in Sales
% Change
Change
in EPS
%
5.6875 5
<5.6875=28.4375%
i r c o n s i d e r i n ge x p a n s i o n
EPS=
o ange in company