Part A: Numerical Concepts (Formulae have to be written clearly before the calculations are done)

Selling price per unit Rs 10

Variable cost per unit Rs 6

Total fixed cost Rs 150000

Expected sales volume 50000 units

(a) Calculate DOL

The new proposal estimates the variable cost per unit to reduce to Rs 4, but will increase the total fixed cost to increase to Rs 200000

(b) Calculate the revised DOL

(c) Give your recommendation

A company proposes to manufacture and sell 100000 units at a selling price of Rs 10 per unit and variable cost of Rs 6 per unit. The total fixed cost is Rs 250000. The requirement of funds is Rs 10 lacs. Debt is available at 10%

Assuming the following debt levels -

a) 0

b) 25%

c) 50%

d) 75%

calculate the different DFLs at each levels

your recommendation assuming increase in EBIT by 5%

The following data is given on Companies M and N

Details Co. M Co. N

Volume of production and sales 80000 units 100000 units

Selling price per unit Rs 10 Rs 8

Variable cost per unit Rs 4 Rs 3

Total Fixed operating cost Rs 240000 Rs 250000

The capital Structure:

20% equity share capital at par Rs 200000 Rs 200000

10% debentures Rs 600000 Rs 200000

15% term loan Rs 400000 Rs 200000

Tax rate 30% 30%

a) Calculate the Operating leverage, Financial Levarage and Combined Leverage for both

b) Based on the EPS, which company is performing better?

XYZ Ltd has the following data:

Units produced and sold 10000

Selling price Rs 30 per unit

Variable cost Rs 20 per unit

Total fixed cost Rs 20000

10% term loan Rs 100000

12% equity capital Rs 50000

Tax rate 20%

a) Calculate the Operating leverage, Financial leverage and combined leverage

b) If the sales increases by 10%, what will be effect on the leverages

c) If the sales decreases by 5%, what will be the effect on the leverages

d) verify your answers