company. Thus, a company with high operating leverage should have low financial leverage so that the combined leverage may be ideal. Similarly, a company having a low operating leverage will stand to gain by having a high financial leverage provided it has enough profitable opportunities for the employment of borrowed funds. Low operating leverage and a low financial leverage is considered to be an ideal situation for the maximization of the profits with minimum of risk. Illustration 4: 'B' Ltd. has the following balance sheet and income statement: Balance Sheet as on 31-3-2009 Liabilities Rs. Assets Rs. Equity Share Capital 10,00,000 Fixed Assets (net) 20,00,000 (Rs. 10 each) Retained Earnings 8,00,000 Current Assets 18,00,000 10% Debentures 10,00,000 Current liabilities 10,00,000 38,00,000 38,00,000 Income statement for the year ended 31-3-2009 23 Rs. Sales Less: Operating Expenses (including Rs. 60,000 as Depreciation) EBIT 6,80,000 2,40,000 4,40,000 1,00,000 Less: Interest EBT Less: Taxes @ 30% EAT 3,40,000 1,02,000 2,38,000 Required: (a) Determine the degree of operating, financial and combined leverages at the current sales level, if all operating expenses other than depreciation are variable costs. (b) If total assets remain at the same level, but sales: (i) increase by 20 per cent and (11) decrease by 20 per cent. (iii) What will be the earnings per share at the new sales levels