Problems of leverage

1. The Well Established Companys most recent Balance Sheet is as follows: Balance Sheet Liabilities Equity Capital (Rs. 10 per share) 10 % long-term debt. Retained earnings Current Liabilities Amount Rs. 60,000 80,000 20,000 40,000 2,00,000 2,00,000 Assets Net fixed assets Current assets Amount Rs. 1,.50,000 50,000

The Companys total assets turnover ratio is 3.0, its fixed operating costs are Rs. 1, 00,000 and its variable operating costs ratio is 40 %. The tax rate is 50%. i. ii. 2. Calculate for the company all the three types of leverage. Determine the likely level of EBIT if ESP is a. Re.1. b. .Rs.3 and c. 0.

The financial data of ABC Company is given below: Variable Expenses as a % of Sales Interest paid Operating leverage Financial leverage Tax rate 66.67 % Rs. 150 5:1 3:1 55%

Prepare the Income Statement of the Company. 3. A firm has Sales of Rs. 1, 87,600; Variable cost of Rs. 1, 05,000; Fixed cost of Rs. 15,000. It has debt of Rs. 1, 00, 000 at 10% and equity of Rs. 1, 50,000. a) Find the operating leverage, financial leverage and combined leverages. Comment on the present working of the firm. b) If the sales drop to Rs. 1, 25,000, find the new EBIT. Is it lower or higher than the old EBIT? Give reasons why it is so. c) What should be the level of sales to make EBT zero? If EBIT is doubled, what be its effect on EBT? 4. Installed capacity Capacity in Operation Selling price per unit 600 units 400 units Rs. 10

Variable cost per unit Fixed Cost: Situation - A Situation - B Situation - C

Rs.6 Rs. 400 Rs. 1,000 Rs. 1,200 Financial Plan -Z (3:1) Rs. 3,000 Rs. 1,000

Financial Plan -X Financial Plan -Y (1: 1) (1:3) Equity Rs. 2,000 Rs. 1,000 10 % Debt Rs. 2,000 Rs. 3,000 Compute Leverages and discuss implications.

5. There are four firms having the same amount of total assets i.e. Rs. 5, 00,000. Each of these firms earns 12 % return on investments. Each firm has fully paid-up shares for Rs. 10 each; the shares were sold at par. Firm A sold equity shares for Rs. 5, 00,000. Firms B, C and D sold equity shares for Rs. 3, 00,000. Firms B, C and D borrowed Rs. 2, 00,000 at different interest rates. Firm B borrowed at 10%. Firm C borrowed at 12 % and Firm D borrowed at 14 %. Tax-rate for all the firms is 50%. Find out the effect of financial leverage with different capital structures. 6. The data relating to two companies are as given below: Company A Company B Equity Capital Rs. 6, 00,000 Rs. 3, 50,000 12% Debentures Rs. 4, 00,000 Rs. 6, 50,000 Output (units) per annum 60,000 15,000 Selling Price / unit Rs. 30 Rs. 250 Fixed Cost per annum Rs. 7, 00,000 Rs. 14, 00,000 Variable Cost per unit Rs. 10 Rs. 75 You are required to calculate the Operating leverage, Financial leverage and Combined leverage of two Companies. 7. Consider the following information for Strong Ltd. (Rs. in Lakhs) EBIT 1,120 PBT 320 Fixed Cost 700 Calculate the percentage of change in earnings per share, if sales increased by 5 %. 8. A firm has sales of Rs. 75, 00,000; variable cost of Rs. 42, 00,000 and fixed cost of Rs. 6, 00,000. It has a debt of Rs. 45, 00,000 at 9% and equity of Rs. 55, 00,000. i) ii) iii) iv) v) vi) What is the firms ROI? Does it have favourable financial leverage? If the firm belongs to an industry whose asset turnover is 3, does it have high or low asset leverage? What are the operating, financial and combined leverages of the firm? If the sales drop to Rs. 50, 00,000, what will be the new EBIT? At what level the EBT of the firm will be equal to Zero?