Question

PBDT Rs 4,00,000, Cost of Machine Rs 2,00,000, Scrap Value at the end of 6th year
20,000; If tax rate is 40% and the company follows Straight Lane Method of
Depreciation, what is its Pay-back period and Pay-back profitability? ​

Answer 1

Leverage and Capital Structure

1. A Ltd. has an average selling price of Rs. 10 per unit. Its variable unit costs are Rs.

7, and fixed costs amount to Rs. 1,70,000. It finances all its assets by equity funds. It

pays 50% tax on its income. B Ltd. is identical to A Ltd. except in respect of the

pattern of financing. The latter finances its assets 50% by equity and 50% by debt, the

interest on which amounts to Rs.20,000. Determine the degree of operating, financial

and combined leverages at Rs. 7,00,000 sales for both the firms, and interpret the

results.