Financial Leverage Questions

s. Month
Question
No & Year
Determine the operating leverage according to the data given
April
1 Sales - 100, Variable Cost - 40, Fixed Cost - 32.5, EBIT - 27.5, Interest - 7.5 and
2018
Profit Before Tax - 20.
Calculate leverages from the following
Rs
Production (units) 75,000
Fixed expenses 7,00,000
Variable cost (1 unit) 7.50
Interest expenses Rs. 40,000
Selling price(1 unit) 25.00

Calculate the operating leverages, financial leverage and the combined leverage
for the following firms.
P Q R
Output (Units) 3,00,000 75,000 5,00,000
APRIL Fixed cost (Rs.) 3,50,000 7,00,000 75,000
2
2016
Variable cost per unit
1 7.50 0.10
(Rs.)
40,000 –
Interest expenses (Rs.) 25,000 -

Unit selling price (Rs.) 3 25 0.50

A company has a choice of the following four financial plans. You are required to
calculate the financial leverage in each case.
Plan - A Plan - B Plan - C Plan - D
NOVEM Equity capital 3,000 2,000 1,000 500
3 BER
2015 Debt 1,000 2,000 3,000 3,500
Operating profit 400
400 400 400
(EBIT)
Interest @ 10% on debt in all cases

Find the financial leverage from the following data :

Net worth Rs. 25,00,000
APRIL
4 Debt equity ratio 3:1
2014
Interest rate 12%
Operating profit Rs. 20,00,000
 Calculate financial leverage and operating leverage under situations A and B and
financial plan I and II respectively from the following information relating to the
operation and capital structure of ABC Ltd.
Installed capacity 1000 units
Actual production and sales 800 units
Selling price per unit Rs. 20
APRIL Variable cost per unit Rs. 15
5
2014 Fixed cost : Situation A Rs. 800
Situation B Rs. 1,500

Financial plan Financial plan

Capital structure
I (Rs) II (Rs)
Equity capital 5,000 7,000
Debt at 10% 5,000 2,000

Compute the operating, financial and combined leverages from the given data :
NOVE Sales 50,000 units at Rs. 12 per unit
6 MBER
Variable cost at Rs. 8 per unit
2014
Fixed cost Rs. 90,000 (including 10% interest on Rs. 2,50,000).

The capital structure of Hindustan Corporation Ltd., consists of equity share

capital of Rs. 10,00,000 (shares of Rs. 100 each) and Rs. 10,00,000 of 10%
debentures. Sales have increased from 1,00,000 units to 1,20,000 units, the
NOVE selling price is Rs. 10 per unit and fixed expenses amount to Rs. 2,00,000. The
7 MBER income tax rate is assumed to be 50%. You are required to calculate the following
2014 (a) Percentage increase in earnings per share.
(b) Operating leverage at 1,00,000 units and 1,20,000 units
(c) Financial leverage at 1,00,000 units and 1,20,000 units.
Comment on the risk position of the firm.

The installed capacity of a factory is 600 units. Actual capacity used is 400 units.
Selling price per unit is Rs.10. Variable cost is Rs. 6 per unit.
NOVE Calculate the operating leverage in each of the following situations :
8 MBER (a) When fixed costs are Rs. 400
2013 (b) When fixed costs are Rs. 800
(c) When fixed costs are Rs. 1,000
(d) When fixed costs are Rs. 1,200