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

To find:- Operating, Financial and Combined Leverage of the firm and interpret the result.

Solution:-

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

₹ 12 Lacs is the fixed operating cost

Assume Income tax rate as 40 %

Operating Leverage = $\frac{Sales-Variable Costs Per Unit}{fixed operating cost}$ $=\frac{60-12}{12}$ =4

Equity share capital ₹ 100 Lakh

10% Debentures ₹ 50 Lakh

Financial Leverage $=\frac{Debentures}{Equity share capital}$  $= \frac{50}{100}$ =0.5

Combined Leverage $= \frac{60-12}{60-12-12}$ =1.3

Hence,Greatest effect operating leverage.

Answer 2

Answer:

Explanation:

Operation leverage :

OL = S - VC / FC

= 60 - 12 /12

= 4

Financial leverage:

FL = Debentures / Equity  share capital

= 50 /100

= 0.5

Combined leverage = 60 - 12 / 60 - 12 - 12

= 1.3

Effect on Operation leverage