Question

The Capital structure of ABC Ltd, is as under:

Equity share capital ₹ 100 Lacs

10% Debentures ₹ 50 Lacs

The sales for the year 2019 are 1.5 Lac units@ ₹ 40per unit

Also, the variable cost per unit is 20 % of sales revenue

₹ 12 Lacs is the fixed operating cost.

Assume Income tax rate as 40 %

Calculate Operating, Financial and Combined Leverage of the firm and interpret the result.

Answer 1

The Capital structure of ABC Ltd, is as under:

Equity share capital ₹ 100 Lacs

10% Debentures ₹ 50 Lacs

The sales for the year 2019 are 1.5 Lac units@ ₹ 40per unit

Also, the variable cost per unit is 20 % of sales revenue

₹ 12 Lacs is the fixed operating cost.

Assume Income tax rate as 40 %

Operating, Financial and Combined Leverage of the firm and interpret the result.

Step-by-step explanation:

Operating Leverage

OL={S-VC}/{FC}=   {60-12}/{12}=4

OL=  FC

S−VC =  

(60−12)  / 12 =4

Financial Leverage

FL={ Debentures }/{Equity share capital }={50}/{100} =0.5

Combined Leverage

CL={60-12}/{60-12-12}=1.3

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