Example 1: EBIT for various Sales Levels

Case (ii) Base Case (i)

-50% +50%
Sales (units) 1,000 2,000 3,000
Sales Revenue @ Rs. 100/unit 100,000 200,000 300,000
Operating leverage is the firm
operating costs to magnify th
Less: Variable Cost @ Rs. 50/uni 50,000 100,000 150,000 in sales on its EBIT.
Contribution 50,000 100,000 150,000
Less: Fixed Cost 50,000 60,000 50,000
EBIT - 40,000 100,000
-100% +100% 150%
DOL 2.5

Example 2: EBIT for various Sales Levels

Case (ii) Base Case (i)
-17% 17%
Sales (units) 250 300 350
Sales Revenue @ Rs. 50/unit 12,500 15,000 17,500
Less: Variable Cost @ Rs. 30/uni 7,500 9,000 10,500
Contribution 5,000 6,000 7,000
Less: Fixed Cost 5,000
### 5,000
### 5,000
EBIT - 1,000 2,000
-100% +100%

DOL 6
ng leverage is the firm's ability to use fixed
ng costs to magnify the effects of changes
on its EBIT.
 Case (ii) Base Case (i)
-50% +50%
Sales (units) 1,000 2,000 3,000
Sales Revenue @ Rs. 100/unit 100,000 200,000 300,000
Less: Variable Cost @ Rs. 50/uni 50,000 100,000 150,000
Contribution 50,000 100,000 150,000
Less: Fixed Cost - - -
EBIT 50,000 100,000 150,000
-50% +50%
Example 1: EPS for various EBIT Levels 5% Bonds Rs. 40,000.
Case (ii) Base Case (i) 10% Preference Shares Rs.20,000.
-40% +40%
EBIT 6,000 10,000 14,000
Less: INT 2,000 2,000 2,000
Financial leverage is the firm
financial charges to magnify
EBT 4,000 8,000 12,000 in EBIT on its EPS.
Less: Taxes @35% 1,400 2,800 4,200
PAT 2,600 5,200 7,800
Less: Pref. Dividend 2,000 2,000 2,000
Earnings available for EQS 600 3,200 5,800
EPS (N = 1000 shares) 0.60 3.20 5.80
-81.25% +81.25%

DFL 2.03
Rs. 40,000.
rence Shares Rs.20,000.

al leverage is the firm's ability to use fixed

l charges to magnify the effects of changes
on its EPS.
5% Debt: 40% 400,000
Equity: 60% 600,000
50% 20% increase
EBIT - 10,000 20,000 40,000 60,000 80,000 100,000 120,000
Less: INT 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000
EBT (20,000) (10,000) - 20,000 40,000 60,000 80,000 100,000
Less: Tax @35 (7,000) (3,500) - 7,000 14,000 21,000 28,000 35,000
PAT (13,000) (6,500) - 13,000 26,000 39,000 52,000 65,000
N 16,000 16,000 16,000 16,000 16,000 16,000 16,000 16,000
EPS (0.81) (0.41) - 0.81 1.63 2.44 3.25 4.06
101% 25%
5% Debt: 0% -
Equity: 100% 1,000,000
50% 20% increase
EBIT - 10,000 20,000 40,000 60,000 80,000 100,000 120,000
Less: INT - - - - - - - -
EBT - 10,000 20,000 40,000 60,000 80,000 100,000 120,000
Less: Tax @35 - 3,500 7,000 14,000 21,000 28,000 35,000 42,000
PAT - 6,500 13,000 26,000 39,000 52,000 65,000 78,000
N 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000
EPS - 0.33 0.65 1.30 1.95 2.60 3.25 3.90
50% 20%
 25% 50%
130,000 150,000 180,000 200,000 250,000 300,000 450,000
20,000 20,000 20,000 20,000 20,000 20,000 20,000
110,000 130,000 160,000 180,000 230,000 280,000 430,000
38,500 45,500 56,000 63,000 80,500 98,000 150,500
71,500 84,500 104,000 117,000 149,500 182,000 279,500
16,000 16,000 16,000 16,000 16,000 16,000 16,000
4.47 5.28 6.50 7.31 9.34 11.38 17.47
28% 54%

25%
130,000 150,000 180,000 200,000 250,000 300,000 400,000
- - - - - - -
130,000 150,000 180,000 200,000 250,000 300,000 400,000
45,500 52,500 63,000 70,000 87,500 105,000 140,000
84,500 97,500 117,000 130,000 162,500 195,000 260,000
20,000 20,000 20,000 20,000 20,000 20,000 20,000
4.23 4.88 5.85 6.50 8.13 9.75 13.00
25%
EBIT - 10,000 20,000 40,000 60,000 80,000 100,000 120,000
EPS-DE -0.8 -0.4 0.0 0.8 1.6 2.4 3.25 4.1
EPS-EQ 0 0.325 0.65 1.3 1.95 2.6 3.25 3.9
Indifference
Point

EBIT-EPS ANALYSIS
18.0

16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0
- 50,000 100,000 150,000 200,000 250,000 300,000

-2.0

EPS-DE EPS-EQ
 130,000 150,000 180,000 200,000 250,000 300,000 400,000
4.5 5.3 6.5 7.3 9.3 11.4 15.4
4.2 4.9 5.9 6.5 8.1 9.8 13.0

T-EPS ANALYSIS

00,000 250,000 300,000 350,000 400,000 450,000

EPS-DE EPS-EQ