Question

a firm has sales of rs.7500000 variable cost of rs.4200000 and fixed cost of rs.600000. it has a debt of rs.4500000 at 9% and equity of rs. 5500000.
A) what is the firm's roi?
B) does it have favorable financial leverage
C) if the firm belongs to an industry whose asset turnover is 3 does it have a high or low asset leverage,
D) at what level the firm will be equal to 0​

Answer 1

Answer:

14%

Explanation:

Answer 2

We are given details about a firm sales and we are required to find out the answers to the questions that follow.

A. Return on investment = $27$%

B. Yes, according to the calculations the firm has favorable financial leverage.

C. Yes, has low asset leverage which is unfavorable for the firm.

D. The level where the firm's EBT will be equal to zero is when Sales are Rs.$22,84,091$.

WORKING NOTES:

Income statement:

Particulars                                                                         Rs.

Sales                                                                            $75,00,000$

Less Variable cost                                                      $42,00,000$

Contribution                                                                $33,00,000$

Less Fixed cost                                                           $6,00,000$

EBIT                                                                              $27,00,000$

Less: Interest                                                                $4,05,000$

EBT                                                                                $22,95,000$

Calculation of Total Investment:

Particulars                                                                      Rs.

Equity Share Capital                                                     $55,00,000$

$10$% Loan                                                                       $45,00,000$

Total investment                                                           $1,00,00,000$

A. ROI = $\frac{EBIT}{Capital Employed}$  × $100$

          $= \frac{27,00,000}{1,00,00,000}$  × $100$

           $= 27$%

B. Return on investment is $27$% whereas interest on loan funds is $9$% which is less than ROI and hence the firm has favorable financial leverage.

C. Calculation of asset turnover ratio and comparison with the industry:

Asset Turnover Ratio$= \frac{Sales}{Total Assets}$

                                   $= \frac{75,00,000}{1,00,00,000}$

                                   $= 0.75$

The industry asset turnover ratio is $3$ whereas a firm has an asset turnover ratio only of $.75$ so it has a low asset ratio when compared to the industry.

D. At what level of sales will the firm EBT be equal to zero.

Particulars                                                                            Rs.

Sales                                                                                  $22,84,091$

Less Variable cost                                                             $12,79,091$

Contribution                                                                       $10,05,000$

Less Fixed Cost                                                                  $6,00,000$

EBIT                                                                                      $4,05,000$

Less Intrest                                                                          $4,05,000$

EBT                                                                                          nil

(For the above calculation we are required to work from behind and then calculate sales from it)

PV Ratio  = $\frac{Contribution}{Sales}$  × $100$

   $44$ $= \frac{10,05,000}{Sales}$ × $100$

  Sales = $22,84,091$.      

Therefore the answers are:

A. Return on investment = $27$%

B. Yes, as calculated the firm has favorable financial leverage.

C. Yes, has low asset leverage which is unfavorable for the firm.

D. The level where the firm's EBT will be equal to zero is when Sales are Rs. $22,84,091$ .

PROJECT CODE: #SPJ3