PROBLEMS ON LEVERAGES

1. From the following, calculate OL.

Sales= 5000 units at the rate of Rs.6 per unit
VC= Rs.2 per unit
FC= Rs.100000
2. From the following calculate OL, FL, & CL.
Sales= 10000 units at the rate of Rs.25 per unit
VC= Rs.5 per unit
FC= Rs.30000
Interest rate= Rs.150000
3. Calculate OL, FL, & CL
FC= Rs.70000
EBIT= Rs.112000
EBT= Rs.32000
4. A firm has sales of 1,00,000 units at Rs. 10 p.u. Variable cost of the produced products
is 60% of the total sales revenue. Fixed cost is Rs. 2,00,000. The firm has used a debt of
Rs. 5,00,000 at 20% interest. Calculate the Operating leverage, Financial leverage,
combined leverage and interpret the same.

5. A firm has sales of Rs. 10,00,000, variable cost Rs. 7,00,000, fixed cost of Rs. 2,00,000
and debt of Rs. 5,00,000 at 10% rate of interest. Calculate operating leverage, financial
leverage and combined leverage.

6. Following is the information from ABC Ltd. calculate F.L., O.L. and C.L. if the number
of units sold is 20,000, Selling price p.u. is Rs. 60, Variable cost Rs. 40 p.u., Fixed cost
is Rs. 6,00,000, Interest burden Rs. 2,00,000, Tax rate 50% and preference dividend Rs.
1,00,000.

7. Calculate O.L., F.L. and C.L. from the following data.

Sales (1,00,000 units) 2,00,000
Variable cost 0.70 p.u.
Fixed cost 65,000
Interest charges 15,000

8. A firm has a sales of Rs.10 lakhs , selling price per unit is Rs.10 , VC per unit is Rs.7 &
FC is Rs.200000.
(i) Calculate the three leverages
(ii) Calculate the # leverages, if the company requires a debt of Rs.500000 carrying
10% ROI
9. The installed capacity of a company is 700 units and the actual production is 500 units.
Selling price per unit is Rs.10. VC per unit is Rs.6. Calculate OL,
(i) When FC is 1500.
(ii) When FC is 500
(iii) When FC is 1100
10. Calculate financial leverage and Operating leverage of the two firms and find which
has greater business and financial risk.
Particulars Firm A Firm B
Sales (Rs.) 20,00,000 30,00,000
Variable cost 40% of sales 30% of sales
 Fixed cost 5,00,000 7,00,000
Interest 1,00,000 1,25,000

11. Following data is available for Anand ltd.

Selling price per unit is Rs.120. VC per unit is Rs.70 & FC is Rs.200000
(i) What is the OL if the company produces & sells 6000 units?
(ii) What is the OL if output increases by 5%?
(iii) What is the percentage change in EBIT?
12. Calculate OL, FL, & CL for situations of A & B and also for financial plans 1 & 2
Installed capacity = 1000 units
Actual capacity = 800 units
Selling price per unit= Rs.20
VC per unit = Rs.15
Situation(A) – Fixed cost = 800
Situation(B)- Fixed cost = 1500
Financial plan(1)- equity share capital of Rs.5000 and debt Rs.5000 carrying 10% ROI.
Financial plan(2)- equity share capital of Rs.7000 and debt of Rs.2000 carrying 10%
ROI.

13. From the following data prepare imaginary cost statement .

PARTICULARS COMPANY A COMPANY B

VC (as a % change of 75% 66.67%

sales)
Interest 300 200
OL 6 5
FL 4 3
Income tax rate 50% 50%

14. Balance sheet of A.ltd is as follows:

LIABILITIES Amt. ASSETS Amt.
E/S capital (@ Rs.10 each) 60000 Fixed Assets 150000
10% Debentures 80000 Current assets 50000
Retained earnings 20000
Current liabilities 40000
200000 200000
The total asset turnover ratio is 3. VC is 40% of sales & tax at 50%. Calculate the three
leverages. If EPS is 5, find out EBIT, FC is Rs.100000.

15. Capital structure of a company consist of equity share capital of Rs 10,00,000(divided

into shares of Rs 100 each). It also consists of 10% debentures worth Rs 10,00,000.

Sales in the first year was 1,00,000 units and in the second year it increased by 20%.
Selling price per unit is RS 10. Variable cost per unit is Rs 6. Fixed cost is Rs 2,00,000.
Tax is 50%.

a. Calculate O.L and F.L at the present level of output.

b. Calculate O.L and F.L for the future level of output.
c. Find out the % change in EPS.
16. From the following calculate OL, FL and CL
EBIT= Rs.112000
EBT= Rs.32000
FC= Rs.70000
If the sales increase by 5%. What is the percentage change in EPS.
17. Sales of a company is Rs.1000000. VC is Rs.700000 FC= Rs.200000. The company has
10% debentures worth Rs.500000
(i) Calculate OL and FL
(ii) If the company wants to double its EBIT what is the percentage change
required in sales.
18. A firm has sales of Rs. 10,00,000, V.C. Rs. 7,00,000 and F.C, Rs. 2,00,000. Debt is Rs.
5,00,000 at 10% rate of interest. What are its OL and FL? What is the required
percentage increase in sales to double the EBIT?

19. From the following information calculate OL, FL and CL: also evaluate the companies.
NOTE: Evaluation is also based on percentages.
PARTICULARS COMPANY A COMPANY B
Sales 2000000 3000000
VC 40% of sales 30% of sales
FC 500000 700000
Financial expense(interest) 100000 125000

20. The capital structure of a company consists of the following securities:

10% preference share capital Rs. 1,00,000
Equity share capital (Rs. 10 shares) Rs. 1,00,000
The amount of operating profit is Rs. 60,000. The company is in 50% tax bracket.
You are required to calculate the degree of financial leverage of the company if the
operating profit increases to Rs. 90,000.

21. Calculate the OL, FL and CL from the following data under situation I and II and
financial plans A and B.
Installed capacity 40,000 units
Actual production and sales 75% of capacity
Selling price Rs. 30 per unit
Variable cost Rs. 15 per unit
Fixed cost: Situation I Rs. 1,50,000
Situation II Rs. 2,00,000
Capital structure Financial plan A Financial plan B
Equity 10,00,000 15,00,000
Debt (20% rate of interest) 10,00,000 5,00,000

22. The following is the balance sheet of Venson Ltd. as on 31-3-2014

Liabilities Amt. Assets Amt.
Equity capital (Rs. 10 per 1,80,000 Fixed assets 4,50,000
share) Current assets 1,50,000
10% debentures 2,40,000
Retained earnings 60,000
Current liability 1,20,000
6,00,000 6,00,000
The company’s total assets turnover ratio is 2.5 times. The fixed operating costs are Rs.
2,00,000. Variable operating cost ratio is 40%. Income tax rate is 50%.
(i) Calculate the leverages.
 (ii) Determine the likely level of EBIT if EPS is Rs. 6

23. P Ltd. has the following Balance sheet and Income statement:
Balance sheet as on March 31st:
Liabilities Amt. Assets Amt.
Equity capital (Rs. 10) 8,00,000 Net Fixed Assets 10,00,000
10% Debt 6,00,000 Current Assets 9,00,000
Retained earnings 3,50,000
Current liabilities 1,50,000
19,00,000 19,00,000

Income statement for the year ending March 31st.

Particulars Amt.
Sales 3,40,000
(-)Operating expenses (including Rs.
60,000 Depreciation) 1,20,000
EBIT 2,20,000
(-) Interest 60,000
EBT 1,60,000
(-) Taxes 56,000
EAT 1,04,000
a. Determine the degree of operating leverage, degree of financial leverage and
degree of combined leverage at the current sales level, if all operating expenses
other than depreciation are variable costs.
b. If total assets remain at the same level, but sales (i) increases by 20% and (ii)
decreases by 20%, what will be the EPS at the new sales levels?

24. If the combined leverage and operating leverage of a company are 2.5 and 1.25
respectively, find the financial leverage and P/V ratio, given that the equity dividend
per share is Rs. 2, interest payable per year is Rs. 1,00,000, total fixed cost Rs. 50,000
and sales Rs. 10,00,000.

25. You are a finance manager in Big Pen Ltd. The degree of operating leverage of your
company is 5 times. The degree of financial leverage is 3 times. Your managing director
has found that the degree of operating leverage and the degree of financial leverage of
your competitor Small Pen Ltd. is better than that of Big Pen Ltd. because of higher
value of degree of leverages. Do you agree with the opinion of your managing
director? Give reasons.