Professional Documents
Culture Documents
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Chapter VIII
Leverage
III
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t. QlQ
. Financial Leverage From Eq(i) EBIT = Q(S - V) - F
.. CoinbinedJ Total Leverage Substituting for EBIT, we get
These three measures of leverage depend to a large DOL = [Q(S - V)] / [Q(S - V) - F] ( i\')
extent on the various income statement items and the Illustration 1
relationship that exists between them. Given below is
Calculate the DOL for XYZ Company Ltd. given ti;,;
the Income Statement of XYZ Company Ltd. and the
following additional information:
relatiqnship that exits between the various items of the
statement: Quantity produced = 5,000
Variable cost per unit = Rs.200
Selling price per unit = Rs.500
Fixed Asset = Rs.90,OOO
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Financial Management ~
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6O.000:'.6.00.0005.10,OOOl:.;i,~:~.
.,ro. ~::i7,Oo.oood5,80
.
~ioPoJ;6,OO;ooO~1,9O.000".j.10,OOO
.000:~~I::?o.oQQ.~i70r~ ': "
", ~'~~,~,.4P.QOO.,;1:60":~909.
. . .
J
-80:OOO~8,00.000 ,'i;;So;oo6'$i;Sb';ooo .~ '{S';90',oOO;;:60.000 ~
ifs~:iiitl~~i
~
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From the table, we can see [hat Bell Metal Works has ~,
Q = F/(S - V) lower fixed costs and higher variable cost per unit when.
compared to Fibre Glass Limited. The selling price per I
For XYZ Company LId.: ~
unit (P) of both firms is the same, viz., Rs.lO. An
Q = 9,00,000/(500 - 200) = 3,000 interesting point we notice that at an output of 50,000 ~
units both firms have the same profit i.e. Rs.60,000.
,
After measuring the DOL for a particular company at
varying levels of output the following observations can However, as sales fluctuate. the EBIT of Bell Metal .-
~
be made: Works fluctuates for less than the EBIT of Fibre
. Glass Limited. This brings us to the conclusion that ~
then DOL will be negative (which does not imply For Bell Metal \-Vorks:
IMPLICATIONS
= 4.17 .
\0
The figures prove our conclusion to be right.
Determining behavior of EstT . Measurement of Business Risk ,.
DOL answers the following type of question: If We know that the greater the DOL. the more sensitive
output (quantity produced and sold) is increased by \
is EBIT to a given change in unit sales. i.e. the greater
10 percent by what percentage will the operating is the risk of exceptional losses if sales become ..
income increase? If the DOL of a firm is say. 2, then depressed. DOL is therefore a measure of the firm's \.
a 10% increase in the level of output will increase business risk. Business risk refers to the uncertainty or .
operating income by 25%. A large DOL indicates variability of the firm' s EB IT. So, every thing else ~
that small fluctuations in the levcl of output will being equal, a higher DOL means higher business risk 4
~
DOL is also important in production planning. For
are compared. ..
instance. thc finn may have the opportunity to change
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its cost structure by introducing labor - saving
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Leverage !I
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mach Ii, 'y, thereby reducing variable labor overhead ~:
while liI'reasing the fixed costs. Such a situation will 'Ii
increase DOL. Any method of production which 'I'
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increase s DOL is justified only if there is a very great II
probahillty that sales will be high so that the firm can
enjoy :he increased earnings of increased DOL.
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FINANCIAL LEVERAGE
While operating leverage measures the change in the The DFL at EBIT levci of 175000 is undefined and I~
EBlT of a company to a particular change in the this point is the Financial Break-even Point. It can be
Jefined as follows: 1'1
outpU( i,he financial leverage measures the effect of
,\
the change in EBIT on the EPS of the company. = I + Dp/(l
Financial leverage also refers to the mix of debt and
EBIT - T) I
equity in the capital structure of the company. The The following observations can also be made from
studying the behavior of DFL.
measure of financial leverage is the Degree of
Financia! Leverage (DFL) and it can be calculated . Each level of EBIT has a distinct DFL.
as follows: . DFL is undefined at the financial Break-even Point.
DFL = (percentage change in EPS)/ (percentage
change in EBIT)
. DFL will be negative when the EBIT level goes.
below the Financial Break-even Point.
DFL = (L\ EPSIEPS)/(6
Substituting Eq(ii) for EPS we get,
EBITIEBIT) . DFL will be positive fof .all values of EBIT that
are above the Financial Break-even Point. This will
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147
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Financial Management
What happens to the owner's rate of the return if the Debt Equity Ratio? The answer is that as the company
becomes more financially leveragcJ, it becomes riskier,
~
managc'TIent decides to finance a part of thi total
investment required of Rs.IO,OOO through debt i.e., increased use of debt financing will lead to
financing? The answer to this question depends on increased financial risk which leads to:
~nses
1-£BIT, ",' , ,
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. ." "pro
'
Rs,
~'OOO
;i~ ~/,
ROE-:iit~oIRs.10,OOO'
ROEat Sales01RS.9,OOO
,'~~
,; .15%i
1()%
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1ft
perceived by lenders of debt as risky. Creditors may
expense, to the extent of Interest (I - tax rate) i.e.,
refuse to lend to a highly leveraged firm or may do so
~
Rs.500. The greater the tax rate, the more is the tax '"'
only at higher rates of interest or more stringent loan
shield available to a company which is financially conditions. As the interest rate increases. the return on ~
leveraged. ...
equity decreases. However, even though the rate of
As was seen in the above example, a company may return diminishes, it might still exceed the rate of return \i
increase the return on equity by the use of debt i.e., obtained when no debt was used. in which case financial ~
the use of financial leverage. By increasing the leverage would still be favorable. ~
proportion of debt in the pattern of financing i.e.. by At
increasing the debt equity ratio, the company should be Implications 4et
able to increase the return on equity. Let us again refer to our earlier example. In the firsl ....
situation, the company was unleveraged, in the 'i
Financial leverage and Risk
second situation the debt-equity ratio was 2: I. The ."
If increased financial leverage leads to increased return balance sheet and income statements are reproduced ~
on equity, why do companies not resort to ever helow:
increasing amounts of debt financing'! Why do financial .....
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and othCf tCfin lending ::1st:t!.!!i0!1~!!1~islon norms Jor
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110 ,
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Lev'Jrage
r~ Balance Sheets CaIoJtaIing !he OTllor XYZ Co. lid. given !he IoIowing inlOl11\llioo:
EquityEamings = Rs.I,62.500
Quantity
Produced
(a) = 5000 1.Ir1i1s
VariableCostper unitM = Rs.200
SellIngPriceperIII~(S) = Rs.500
t!
Number 01equityShareholders
(N) = 5,00,000
FixedExpenses(F) = Rs.9,OO,O'X>
Inleresl(I) = Rs.75.000
PrelerenceDividend(Op) = Rs.50,000
Income Statements CoqxualeTax(T) = 50%
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DTL .
5,000 (5,000 - 2(0) t
5 000 (500 - 200) - 9 000- 75 000 - 50,000
, "(I - 0.5) II!
= 3.53
II
DTL = DOL x DFL
= 2.5 X 1.41 = 3.53
Thus, when the oUtput is 5,000 units, a one percent
change in Q will result in 3.5% change in EPS.
EBIT "'I
DFL =
D Appli.cations and Utility of Total Leverage
EBIT-I-~
I-T Before understanding what application the total
3000 leverage has in the financial analysis of a company, let
Unleveraged = us make a few more observations by studying its
3000 = 1
behavior. Let us calculate the overall break-even point
= 3000 =
Leveraged 1.5 and the DTL for the various levels of Q, given the
3000 - 1000 following information:
What do these figures imply? This implies that if F = RS.8,OO,ooo
EBIT is changed by 1%, EPS will also change by I = Rs.80,ooo
I %, the company uses no debt and by 1.5% when it
uses debt in the ratio of2:1 (66.67% o£total capital). Dp = Rs.60,OOO
This is proof of what we have stated earlier: The S = Rs.I,OOO ;J
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Financial Management
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. If the level of '.Jutput is less than the overall change in Q. For example, if DTL for Q of 3000
break-even point. then the DTL will be negative. units is 6 and there is a 10% increase in Q. the ~
II
. If the level of output is greater than the overall
break-even point. then the DTL will be positive.
affect on EPS is 60%.
Percentage change in EPS = DTL (Q = 3000) x J
DTL decreases as Q increases and r~aches a limit Percent change in Q
of I. : ",,6 x 10% ~
Further. the, DTL' .has the follow)ng applications in = 60%
analyzing the financial performance o(a company:
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2. Measures Total Risk: DTL measures the total '1
1. Measures changes in EPS: DTL measures the
changes in EPS to a percentage change in Q. Thus,
risk of the company since it is a measure of bo.th ,...
operating risk and total risk. Thus. by measuring
the percentage change in EPS can be easily total risk, it measures the variability of EPS for 1
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assessed as the product of DTL and the percentage a given error in forecasting Q.
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150 ...
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Section I Ik
a. 4.17 'II
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b. 1.67
c. -1.67
jl
d. -4.67
e. Undefined.
3. The degree of financial leverage of the firm is :1:
a. 4.41
b. 1.39 :111
c. 1.09
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d. -1.09 1II
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e. -1.39. im
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4. The degree of total leverage of Saturn Ltd. is
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a. 6.13 m
b. 2.32
c. 1.82
d. -1.82
e. -2.32.
5. The levels of output at which DOL and D11.. are undefined
a. 215 and 115 .
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151
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Financial Management ,..
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6. The financial break-even point for the finn is
a. Rs.3.00.000 ,
b. Rs.2.85.000
(
c. Rs.l.15.000
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d. Rs.l.05.000 (
I
7.
e. Rs. 85.000
Operating leverage measures the sensitivity of th~ to changes in qu!ntity.
c
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a. Earnings per share c
II b. Profit after tax
c. Earnings before interest and tax
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d. Earnings before tax but after interest ,.
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e. Expenditure. .
8. l'
Degree of financial leverage can be given by which of the following fonnula taking '"
EBIT = Earnings before interes~ and tax; Dp =
Dividend on preference shares; T = Tax rate;
I = Interest ,
EBIT
a. I
- Dp ..
EBIT - I - l=-T
EBIT
,
~
b.
Dp ~
EBIT + I + ! - T
Dp ~
c.
~
EBIT + I
EBIT
d.
EBIT + I - 1 ~p T
e. None of the above.
9. Degree of financial leverage is below the financial break-even point.
a. Undefined
b. Positive
c. Negative
d. Zero
e. Has no relationship.
10. Degree of total leverage (DTL) can be calculated by which of the following formula given Degree
of operating leverage (DOL) and Degree of tinancialleverage (DFL).
a. DOL + DFL
b. DOL + DFL
c. DFL - DOL
d. DOL x DFL
e. None of the above.
11. The following data are available for age group electronics.
152
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levorago
The degree of operating leverage for age groups when the output (Q) is 5000 units is
a. 7 I'
b. 6
c. 5
d. 4
e. 3 I~
a. 5.5 ':11
b. 4.5
c. 3.5
d. 2.5 lill
e. 1.5
Section II
@4. 12 company decides to sell 20,000 units of Alpha, generating EBIT of Rs.3,50,ooo. The DOL for this
level is 3.5. Find out the range of variance in EBIT if the actual sales varies between +20% and - 10%.
5. If P = 400; V = 240; F = 80,000; 1= 30,000; T = 60% and Pref. Dividend =15,000
What is degree of financial leverage when sales is 40,000.
6. The following data are available for two firms X and Y.
(in Rs.)
0'
Finn X: "
," FinnY"
"', " -c
15,000 Ju 10,000<' .
Nutnber of Equity Shares
Tax Rate 50% 50%
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Financial Management
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For hoth Ihe firms calculz:.: the following
,...
a. Earnings before interest and tax \-
h. Earnings per share (:
e. Operating break-even point
II
d. Finar.cial break-even point
r....
e. Over-all break-even poinl r....
r. Degree of operating leverage
r....
g. Degree of financial leverage
h. Degree of tolal leverage ,.....
7. The following data is given for Plaza Limited: P = Rs.50, V = Rs.30, F = Rs.l ,00,000, I = Rs.50,OOO,
T = 50 percent, and D = Rs.20,OOO. What is the DFL for Plaza Limited when the !evel of output is ,
.....
10,000?
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The following data are available for the Broadway and Midway Companies: ....
@8. ,
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'BfQadwa~,Co.
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Midway Co. p
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10,000 units
Rs.200 #'
...
~;:!:f~~i~:!'~~!;:r1!::I;u,":r~'... . RS.150
~ Fixed operating cost p~r1~riitofoutput .Rs.6Q Rs.30
F
...
Rs.6;00,000
~~« Equity R'S.3,oo,OOO "
f'
...
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Preferen~:~?at~s<'"
Debt, ' .':'
. Rs.l,oo,ooo
Rs.6,OO,OOO
Jj' ;S.4,OO,OOO. ( P'
,...
...
Interesrrate~br{'debt, 16.25% 15% ",,;
r...
Di viden~:fate'~n; prefer~nce share";,,. :13% 'd' ,,','
Tax rate"'"';''' ,.:'- ,60% 60%'':;
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Required:
...
i. Calculate the ROE, DOL, DFL, DTL, operating break-even point, financial break-even point and ....
overall break-even point for each company. /'
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ii. As a financial analyst which of the two companies would you describe as more risky? Give reasons.
9. /"
The sales revenue of Leveret Company @ Rs.20 per unit of output is RS.20 lakhs and contribution is '"
Rs.1O lakhs. At the present level of operations, the DOL of the company is 2.5. The company does not
,..
have any preference shares. The number of ordinary shares is I lakh. Applicable corporate income tax
rate is 50% and the rate of interest on debt capital is 16% p.a. What are the EPS (at sales revenue of
,
Rs.20 lakhs) and amount of debt capital of the company if a 25% decline in sales will wipe out EPS? ,..
...
(Note: DOL - Degree of Operating Leverage; EPS - Earnings Per Share)
,.
10. The following data pertain to Exotica Limited. "
, Selling price per unit Rs.loo ,.
Rs.60 '"
Variable cost per unit
"'
Fixed operatiJigcosts RsAO,OOO '"
Sales volume 1,200 units ..
'"
What is the financial leverage of the company if 10% change in sales will bring about 90% change in EPS?
'"
What percentage increase in variable cost will result in a 750% increase in the existing operating leverage? '"
11. The operating and total leverages of Enigma Company are 2 and 5 respectively. Total variable costs at the ""
existing level of operations amount to Rs.6,50,OOO.Interest expense and dividend on preference shares are ...
Rs.75,OOOand Rs.36,OOOrespectively. Corporate income lax rale is 60%. Whal is the sales revenue of Ihe
,.
company? ""
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leverage
12. Selected financial data for Alacrity Limited are given below:
"".,
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Variable e,!,pensesas;percentof sales';'.."~r~F ,;' 661% , ,
:~,' .. "", ',.., 3
Degree of operating-leverage 5
Degree offinancialleverage 3
~.
Income tax rate 50%
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The company has not raised funds through issue of preference capital.
" What are the fixed expenses and profit after tax of the company?
1l1e DFL of Ajay Castings is 2. The company pays an annual interest of RS.I ,00,000 and a preference
(J/13. dividend of Rs. !5,000. The tax rate for the company is 50%. By what percentage will there be a fal: in
II
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the EPS if EBIT drops to Rs.1 ,30,OOQ? ,r
14. The DTL and DFL of a company are 3 aJ;\d 2 respectively. The company pays an annual interest of
Rs.60,000 and preference share dividend of Rs.16,OOO. The total variable costs of the company are
Rs.2,OO,000 and the applicable income tax rate is 60%. What are the amounts of sales revenue and fixed
operating costs? I~~
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15. The Gudia Enterprises manufactures and sells a typical electronic toy. The selling price and variable cost ""j
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per lOy are Rs.20 and Rs.IO respectively. Operating fixed costs amount to Rs.5 !akhs. The interest expense
is Rs.2.5 lakhs and DFL is 2. What are its DOL and Sales Volume respectively?
16. Ill'i
The Sigma Company's operating and total leverage are 2 and 3 respectively at the present sales level of
"I~i
10,000 units. The selling price per unit of output is Rs.12 while its variable cost is Rs.6. The company
has no preference share capital. Applicable corporate income tax rate is 50%. The rate of interest on the !1II1
company's debt is 16% p.a. What is the amount of debt in the capital structure of the company? .l
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Solutions
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Section I
1
\. c 2. b 3. b 4. b 5. b 6. e 7. c 8. a 9. c 10. d I \. .1 12. U ,
Section II .I
II
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1. a. EBIT = Q(P - V) - F
= 25,000 (20 - 12) - 60,000
,
...
II
= 25,000 x 8 - 60,000 't
= Rs.1,40,000 <II
...
b. EB IT = Q(P - V) - F I
1"1
= 40,000 (70 - 40) - 3,00,000 'I
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= Rs.900,000 it
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2. . a. DOL = Q(P- V) II
Q(P -V) - F ..
Q = 100, '(P - V) = 400 F = 80,000
.-j
100x 400 '1
DOL = =-1
100 x 400 - 80,000 "
b. if Q = 300 then
,
II
...
DOL = 300 (400) = 1,20,000
300 x 400 - 80,000 1,20,000 - 80,000 .II
..
= 1,20,000 = 3 ti
40,000 ...
3. (P - V) = Rs.1O
...
EBIT "!I
= Q(P - V) - F
60,000 = 10.000 (10) - F ...
F = Rs.JOO.OOO
- 60.000 = Rs.40,000
...
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4. As the variation is from 10% below and 20% above
Ai
:. if Q is more than forecast by 20% then
L1EBIT = 3.5 x 0.2 = 0.7 = 70% .I
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and if Q is less Ihan forecast by 10% then
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~BIT = 3.5 (0.10) = -0.35 "'I
== -35%
...
EBIT '1
5. DFL =
"""
EBIT - I - t,p
I-t
J
- Q (P - V) - F
lQ(P-V)-F)J-I-
.'
t,p
I-t
J
Q = 40,000; P = Rs.400; V = 240; F = !!O,OOO
J = 30,000; T = 0.6; t,p = ! 5,000 .
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Leverago
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M,OO,OOO - XO,OOO
.....,
M,O(),<X)O - 1,47.500
..... 63,20,!X)O
=
62,52,500 11\
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DFL = l,t1l0.
6.
Given X
I. Q 80,000
2. S.P.lUnit , 20'
3. Variable CostlUnit 10
-*
4. Fixed Cost 60,000
5. Interest 20,000
6. Dp 10,000
-.;
7. No. of shares 15,000 . '- 10,000
--
8. Tax Rate .50% ,"""'.' ',50% '~
- Required 1\ III,
......
I. EBIT = Q(P - V) - F 7,40,000 -9;10,000 I
-- 2.73
!II!
2. ,9.33 "
II
-- E.P.S = (EBIT - I) ~ - 1) - Dp Iii
--- EBIT = I + -
Dp
]-T
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...-J 5. Overall B.E.P (Units) 10,000 2,250
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..- F+I+~
I-T
- ."".,
[ P-V
]
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-"" 6. DOL = Q (P- V)
Q(P- V)-F
1.081 1.309
-- Q(P-V)-F-I- ~I-T
- 8. DTL = Q (P - V)
1.142 1.047
Q(P- V) - F - I - ~I-T
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Financial Managemont
E[3(T
7. DFL , (1)
D
EBIT- I-~
I-T
Ell IT = Q(P, V)- F
= 10,000 (50 - 30) - 1,00,000
Rs. I,00,000
Substituting the value of EBIT and values of I, T, and Dp in (I)
we gel
= 1,00,000
DFL
1,00,000 - 50,000- 20,000
= 1,00,000 0.5
10,000
= 10
8. i.
,,'}'~~iP~;~:::d1~9*~~;~g~~!
2,ool#?'"
'c97~5{)(f 60,000
".,
: 1,02;500 1,40,000
61,500 84,000
41,000 56,000
, ," ' "
.. "
28;000
i~.':hf:;~~fit to equity shareholderS:
, " ", " " " " ' ,", '
"56,000
Ifk.~::'.?ROE :',frofit avaHable,'toequity
',--" .~.
28,000: , 56,000' .
158
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Financial Management
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7. OFL
EI3IT Co
. ,"'" (1)
E13IT- 1- J2L
1-1' '-
EBiT = Q(p. V)'- F
C-
10,000 (50 - 30) - 1,00,000
RS.I,OO,OOO r'-
Substituting the value of EBIT and values of I, 1', and 01' in (I)
we get c..
= 1,00,000
OFL
1,00,000 - 50.000 - 20,000 c...
1,00,000 0.5 c.
10,000
= 10
c..
8. i, c..
.,)~f;iK;;i,?!:M~9*~~~S§; c.
c..
,-
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.-
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"-
.-
10.
~,~,~it7rf~~(,<t~~'j'l
, ,'='~~}.
='25,
.-
'-
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1 O() OOO ' "',' , 2', 00 , 000 "
, ~'. "cq
"97;500.' ,60,000 c..
. 1,02;500 1,40,000
....
61:500 84,000
41,000 56,000 ...
13, 13,000 -
(I,OQ,OOOx 100) ..
I, ,liji;,;:'gF;fitt~equity shareholders. 28,000 .' 56,000
Ii
, "',' ,', ',,", '
...
Ii 14j,~::<:iROE=.P['ofit availabk{'toequity 28.600' , 56,000' ,
;','/shareholders/equityxl00
" '
3,00,000 x 100 6.00,000 x 100 ...
= 9.33% = 9.33%
4 2.5 ...
II
15. . ' DOL =,[Q(S - V)]
.. , " EBIT
..
- Preference dividend
'
2,00,000 2,00,000
"Ii ~~; :.§<~riFr.= ~BIT PBT
,:.';
'
,
,"
[ I-T ] -
(1,02,500 32,5(0) 1.40,000
..
= 2.86 = 1.43
~
17, DTI. ==DOL x DFL = 4 x 2.86 = 2.5 x 1.43 ~
= 11.44 = 3.575
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158
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~ Levorage
~, F , ,< ",
Broadv''1Y'Co. ,.' .
.': '.i:~~1\-¥i~~~y..Co.;
;' .'<:~>6:~~>';' ::'Rs.
w tJ,':.,
'
. '~f;:>l Je:~\~ '';.~~' ':
18. Operating Break Even Point QF/(P-V) .t...\"
'':
"
i "
75,000
:';,:~{~~~~:
, ,
" ..~ .'C'",.'~,'~1,'"
, ,
9,125'units.,: : \
~
=7i200:'units I
J
Working Notes:
w 4,.:l';',:..\..:.,::,::J{Broadwa y ' Co '.-'f',", < . '. \c; Midwa Co. '. ,
,',:;;,:",::.::.;)~~~,. : " c.'" " .' "'-, ' , ",' y
H ,/,,,~Rs.
,.
1. Profit before interest
w Total contribution 5;00,000
-
,
159
,.
'!I
" '-
~
'-I
Rnanclal Management
j
0.75 - 0.08x
0.75
= 0; x = 0.08
= 9.375
J
At sales revenue of Rs.20 lakhs,
Rs.9,37,500
J
10.
EPS = [10 - 6 - 0.16 (9.375)] 0.5
.
Degree of operating leverage =
= Rs.1.25
Q (SP- VC)
J
Q (SP - VC) - FC
~~
Where Q is the sales volume
SP = Selling price per unit
J
VC = Variable cost per unil J
FC
DOL
=
=
Fixed cost
1200 (100 - 60) J
=
1200 ( 100 - 60) - 40,000
6
~
Degree of lOlal leverage = % change in EPS
% change in sales
J
= 90
10
~
= 9 ~
DTL = DFL x DOL
9 = DFL x 6 ~
DFL = 1.5 (1 ) 'I
DOL = 6 ~'
750% increase in DOL = 6 + 750% of6
= 51
.,
6'
~
160 ~
~
~
:),
~ Leverage
s-v
D1'L=-
III
II
S-V-F-l- ::l.
1-1' .
~ We know thai D1'L = 5, V = 6,50,000, I = 75,000, Dr = 36,00<' Ulld T = 60%
5 = S - 6150,000
-!I (2)
S - 6.50,000 - F- 75000- 36,000
, 1-0.6
.. From (1) 2S - 13,00,000 - 2F = S - 6.50,000
or 5 - 2F = 6,50,000 (3)
..
From (2) 5 = S - 6,50.000
5 - F - 8,15,000
~ or 55 - SF- 40,75.000 = S - 6,50,000
or 4S - SF 34,25,000 = ""'''''' (4)
.. Multiplying (3) by 4 and subtracting it from (4) we get
4S - SF = 34,25,000
II!I - 4S -I-8F = (-) 26,00,000
3F = 8,25,000
~
, 8,25,000
,. F = = RS.2,75,OOO
3 I
=
~
S - 2 (2,75,000) 6,50,000
f or 5 = 12,00,000. I~
f EBIT
12. DFL = ii;
, 3 =
EBIT - Interest
EBIT
'Ii
"'
I
I
EBI1'- 20 :BI.
- Interest 20 I' 1
PBT ii'
10
Tax @ 50% 5 111
PAT = Rs.5 lakhs I
I
I
II 1
DOL = Q (P - V)
Q (P - V) - F 11'11
III:
5 = Q (P - V)
30 Jil
5 x 30 = Q(P - V) = ISO .1 l
Q( P - V) - F= EBIT = 30
Subtracting (2) from (I) we get
Fixed Expenses
.. = Rs. 120 lakhs
161
:1
I.
:,-
Financial Managoment
EI3I1'
13. DFL = '1
EI3IT - I - ~1-1'
[131'1'
2
EI3IT - I 00000-
,.
15,000
(I -0.5)
i
EI3IT = (EI3IT - 1.30.(00)2 EBIT ::: 2,60,000
1
If E13IT drops to 1.30,000 i.e. a fall of 50%,
EPS will fall hy 2 x 50% = 100%
~
... ,.
- -.
~-14. DTL 3
A
DFL 2 ..
Therefore, DOL = 3/2 = 1.5
Given DFL = 2 ~
.
EBIT
EBIT
- I - J2.L
= 2 .
,.
1-1'
EBIT = 2
EBIT - 60 000 - 16,000
, 0.4
EBIT
2
EBIT - 1,00.000
EBiT ::: 2EBIT - 2,00,000
EBIT 2.00,000
Given DOL 1.5
Contribution ::: 1.5
EBIT
Contribution ::: 1.5 EBIT
Q (P - V) ::: 3,00.000
QP - QV ::: 3,00.000
QP - 2,00,000 ::: 3.00,000
QP ::: 5.00,000
or sales revenue ::: 5.00,000
Fixed Operating Costs ::: Contribution - EBIT
:::
Q(P - V) - {Q(P - V) - F}
::: 3.00,000 - 2,00,000
RS.I,OO,ooo
EBIT
15. DFL :::
EBIT - I
Let the sales volume of the toys be x.
x (20-10)-5
2 :::
[x (20 - 10) - 5)1- 2.5
IOx-5
2 :::
lOx - 7.5
20x - 15 ::: lOx - 5
lOx ::: 10
x ::: I lakh units
Q (P - V)
DOC :::
Q (P - V) - F
:::
1,00,000 x 10
::: 10,00.000::: 2.
(1,00,000 x 10) - 5.nO,OOo 5,00,000
162
....
I
I
;
I
I
,.=-- I
Ii
Leverage
IJ
16. Q (P - V)
Degree of operating leverage = I»
Q (P - V) - F 4
r-
Where Q is the quantity sold.
IIli
2 = 10,000(12 - 6) 1
10,000 (12 - 6) - F
:. F = 30,000
!
Hi-
III
II:
illI
1~fl
"II
III.
i
;:~
il
i~I
I
ii
II
II
II.
I
163