Leverage

1. EBIT ₹ 200
Contribution ₹400
Interest ₹100
Calculate DOL, DFL, DCL

2. Sales (100,000 unit ₹ 8 each) = 8,00,000

Variable cost (₹4 per unit) = 4,00,000
Fixed cost = 2,80,000, Interest = 20,000
Calculate the degree of operating leverage, financial leverage, and combined
leverage.

3. Sales = 3200,000
Variable cost = 16,00,000
Fixed cost = 4,80000
Interest = 1,20,000

4. The following is the balance sheet of W Ltd as on 31/03/2020

Particular Amt. Particular Amt.
Equity share capital Fixed Assets 4,50,000
(Rs. 10 F.V/ Share) 1,80,000 Current Assets 1,50,000
10% debentures
Retained earning
Current Liabilities 2,40,000
60,000
1,20,000

6,00,000 6,00,000

The company’s total assets turnover ratio is 2.5 times. The fixed operating cost is
₹ 2, 00,000. Variable operating cost ratio is 40%. Income tax rate is 50%.
Calculate leverage and determined the level of EBIT if EPS is ₹ 6
5. The following data is given for Beta Ltd. and Theta Ltd. the all the types of
variance.
Particular Beta Ltd. Theta Ltd.
Sales 50,00,000 10,00,000
Less: Variable Cost 20,00,000 30,00,000
Contribution 30,00,000 70,00,000
Less: Fixed Cost 15,00,000 40,00,000
Operating Profit 15,00,000 30,00,000
Less: Interest 500,000 10,00,000
EBT 10,00,000 20,00,000

6. XYZ Ltd. produced and sold 1, 00,000 units of a product at the rate of ₹ 10 per
unit. For production of 1, 00,000 units it has spent a variable cost of ₹ 6, 00,000
at the rate of ₹ 6 per unit and a fixed cost of ₹ 250000. The firm has paid
interest ₹ 5000 at the rate of 5 % and ₹ 1, 00,000 debts. Calculate operating
leverage, financial Leverage and Combined Leverage.

7. A firm has sales of 1, 00,000 units at ₹ 10 per unit. Variable cost of the
produced products is 60 % of the total sales revenue. Fixed cost is ₹ 2, 00,000.
The firm has used a debt of ₹ 5, 00,000 at 20% interest. Calculate the operating,
Financial and combined leverage.

8. VST Corporation has sale of ₹ 40 Lakhs, variable cost 70% of the sales and
fixed cost is ₹ 8, 00,000. The firm has raised ₹ 20 lakhs funds by issue of
debentures at the rate of 10%. Compute operating, financial and combined
leverages.

9. Calculate DOL, DFL,DCL. From the following data under situation I and
situation II and financial plan A, and B
Installed capacity 4000 units
Actual production and sales, 75% of the capacity
Selling price, ₹ 30 and variable cost ₹ 15 per unit
Fixed cost under situation I ₹ 1500 and under situation II ₹20,000
 Capital structure
Particular Financial Plan
A B
Equity ₹ 10,000 ₹15000
Debt (0.20 interest) 10,000 5000

10.Following data available for Raj limited:

Selling price – 120 per unit

Variable cost – 70 per unit

Total fixed cost – 2, 00,000

a. What will be the operating leverage if Raj ltd. produces and sells 6000 units and
8000 units?
b. What is the percentage change in EBIT if output increases by 5%.

11.From the following information, calculate degree of operating leverage.

Particulars Year 2018 Year 2019

Sales 10,00,000 12,50,000

Variable cost 6,00,000 7,50,000

Fixed cost 2,50,000 2,50,000

12.From the following particulars of PQR company calculate Degree operating and
financial leverage. The company’s current sales revenue is ₹ 15, 00,000 and
sales are expected increase by 25%. ₹ 9, 00,000 incurred on variable expenses
for generating ₹ 15 lakhs sales revenue and for other (₹ 20 for total unit 7500).
The fixed cost is ₹ 2, 50,000. The company has ₹ 10 lakhs equity share capital
and ₹ 10 lakhs, 10% debt capital. ₹ 10 per equity share and 50 % tax rate.
13.The installed capacity of a factory is 700 units. The actual capacity is 500 units.
Selling price per unit is Rs. 10 and the variable cost per unit is Rs. 6. Calculate
operating leverage for the following situations;
a. When fixed Cost are Rs. 500
b. When fixed Cost are Rs. 1100
When fixed Cost are Rs. 1500

14.The capital structure of Reema ltd. consists of the following information;

10% Debentures – 5,00,000

12% Preference shares – 1,00,000

Equity shares of Rs. 100 each – 4,00,000

Operating profit is 1,60,000 and the company is having tax bracket of 50%.

a. Determine the EPS.

b. Determine the percentage change in EPS if there will be 30% increase in
EBIT.
c. Determine the degree of financial leverage.

15.KPMG Ltd. Has currently an ordinary share capital of ₹ 25 lakhs, consisting of

25000 shares of ₹ 100 each. The management is planning to raise another ₹ 20
lakhs to finance a major programme of expansion through one of four possible
financial plans.
a. Entirely through ordinary shares
b. ₹ 10 lakhs through ordinary shares and ₹ 10 lakhs through long term
borrowings at 8 % interest.
c. ₹5 lakhs through ordinary shares and 15 lakhs through long term borrowing
at 9% interest.
d. ₹ 10 lakhs through ordinary shares and ₹ 10 lakhs through preference shares
with 5 % dividend.
The company’s expected EBIT will be ₹ 8 lakhs. Assuming a corporate tax rate of
46 %. Determine the EPS in each alternative and comment which alternative is
best and why?
16.Penta four Ltd., has currently an all equity capital structure consisting of 15000
equity shares of ₹ 100 each. The Management is planning to raise another ₹ 25,
00,000 to finance a major expansion programme and is considering three
alternative methods of financing.
a. To issue 25000 equity shares of ₹ 100 each,
b. To issue 25000, 8% debenture of ₹ 100 each,
c. To issue 25000, 8% preference shares of ₹ 100 each.
The company’s expected EBIT will be ₹ 8 lakhs. Assuming a corporate tax rate of
46 %. Determine the EPS in each alternative and comment which alternative is
best and why?

17. Calculate operating leverage, financial leverage and combined leverage under
situation 1 and 2 in financial plans A & B from the following information
relating to the operation and capital structure of a company.

Installed capacity – 2,000 units

Actual production and sales – 50% of the capacity
Selling price ₹20 per unit
Variable Cost ₹10 per unit
Fixed Cost:

Under Situation I ₹ 4,000

Under Situation II ₹ 5,000
Capital Structure:

Financial Plan
A (₹) B (₹)
Equity 5,000 15,000
Debt (Rate of Interest 10%) 15,000 5,000
20,000 20,000

18.The date relating to two Companies are as given below:

PARTICULAR COMPANY A COMPANY B

Equity Capital ₹ 6,00,000 ₹ 3,50,000
 12% Debentures ₹ 4,00,000 ₹ 6,50,000
Output (unit) per annum 60,000 15,000
Selling price / unit ₹ 30 ₹ 250
Fixed Costs per annum ₹ 7,00,000 ₹ 14,00,000
Variable Cost per unit ₹ 10 ₹ 75

You are required to calculate the Operating, Financial and Combined Leverage of
two Companies.

19.The capital structure of the Progressive Corporation Ltd. consists of an

ordinary share capital of ₹ 10,00,000 (shares of ₹ 100 per value) and ₹ 10,00,000
of 10% Debentures. The unit sales increased by 20% from 1,00,000 units to
1,20,000 units, the selling price is ₹ 10 per unit, variable costs amount to ₹ 6
per unit and fixed expenses amount to
₹ 2,00,000. The income tax rate is assumed to be 35 %.
You are required to calculate the following:
a. The percentage increase in earnings per share
b. The degree of financial leverage at 1,00,000 units and 1,20,000 units.
c. The degree of operating leverage at 1,00,000 units and 1,20,000 units.
Comment on the behavior of operating and financial leverage in relation to
increase of production from 1,00,000 to 1,20,000 units.

20.Calculate operating leverage and financial leverage under situations A, B and C

and financial plans 1, 2 and 3 respectively of XYZ Ltd.

PARTICULAR Amount

Installed Capacity (units) 1,200

Actual production and sales (units) 800
Selling price per unit (₹ ) 15
Variable cost per unit (₹ ) 10
Fixed Costs (₹ ) Situation A 1,000
Situation 2,000
B
 Situation 3,000
C
Capital Structure: Financial Plan
1 2 3
Equity ₹ 5,000 ₹ 7,500 ₹ 2,500
Debt (interest 12%) 5,000 2,500 7,500

21.A Manufacturing company has the following capital structure:

40,000 equity shares of ₹ 50 each ₹ 20,00,000
Retained earnings ₹ 10,00,000
10% debentures ₹ 10,00,000
12% preference shares ₹ 10,00,000
The present EBIT is ₹ 10,00,000. The company is contemplating an expansion
programme requiring an additional investment of ₹ 10,00,000
It is hoped that the company will be able to maintain the same level of earnings. To
raise the additional capital the company has the following alternatives:
I) To issue debentures at 11%
II) To issue preference shares at 13%
III) To rise the entire additional capital through equity shares.

Examine the alternative and suggest which alternative is best for the company.
Assure tax rate to be 35%