Answered

Lever Balance Sheet on 31st March 33. PL Ltd. has the following Balance Sheet and Income Statement information: 7.44 Income Statement for the year Liabilities Rs. Assets Rs. Particulars Rs. Equity capital (Rs.10) Retained earnings 3,50,000 8,00,000 Net fixed assets Current Sales 3,40,000 10,00,000 Less: Operating assets 9,00,000 Exps 1,20,000 10% Debt 6,00,000 EBIT 2,20,000 Current liabilities 1,50,000 Less: Interest 60,000 EBT 1,60,000 Less: Taxes 56,000 Total 19,00,000 Total 19,00,000 EAT 1,04,000 Note: Operating expenses Rs. 1,20,000 include Rs.60,000 depreciation. 1. Determine Operating, Financial and Combined leverages at the current sales level, if all operating expenses, other than depreciation, are variable costs. 2. If total assets remain at the same level, but Sales (i) increases by 20% and (ii) decreases by 20%, what will be the earnings per share at the new sales level?​

Answer :

parulsirohi66

Answer:

To determine the operating, financial, and combined leverages, we need to first calculate various components using the given information.

1. **Operating Leverage (OL)**:

Operating Leverage measures the impact of fixed operating costs on operating income.

Formula: OL = Contribution Margin / Operating Income

Contribution Margin = Sales - Variable Operating Costs

Operating Income = EBIT - Interest

Given:

Sales = Rs. 10,00,000

Variable Operating Costs (excluding depreciation) = Rs. 60,000

EBIT = Rs. 2,20,000

Interest = Rs. 60,000

Calculating:

Contribution Margin = Sales - Variable Operating Costs = Rs. 10,00,000 - Rs. 60,000 = Rs. 9,40,000

Operating Income = EBIT - Interest = Rs. 2,20,000 - Rs. 60,000 = Rs. 1,60,000

OL = (9,40,000 / 1,60,000) = 5.875

2. **Financial Leverage (FL)**:

Financial Leverage measures the impact of fixed financial costs on earnings before tax (EBT).

Formula: FL = EBIT / EBT

Given:

EBIT = Rs. 2,20,000

EBT = Rs. 1,60,000

Calculating:

FL = (2,20,000 / 1,60,000) = 1.375

3. **Combined Leverage (CL)**:

Combined Leverage measures the overall impact of fixed costs on earnings after tax (EAT).

Formula: CL = OL × FL

Calculating:

CL = 5.875 × 1.375 = 8.078

Now, let's calculate the new earnings per share (EPS) after the changes in sales.

Given:

Total assets remain constant.

Sales increase by 20% and decrease by 20%.

Total assets = Rs. 19,00,000

New Sales:

(i) Increase by 20%: Rs. 10,00,000 * 1.20 = Rs. 12,00,000

(ii) Decrease by 20%: Rs. 10,00,000 * 0.80 = Rs. 8,00,000

New EBIT for both scenarios will change by the same percentage as sales since other factors remain constant.

New EBIT:

(i) Increase by 20%: Rs. 2,20,000 * 1.20 = Rs. 2,64,000

(ii) Decrease by 20%: Rs. 2,20,000 * 0.80 = Rs. 1,76,000

New Earnings per Share (EPS):

EPS = (EAT - Preference Dividend) / Number of Equity Shares

Given:

EAT = Rs. 1,04,000

Preference Dividend = 0 (no preference dividend mentioned)

Number of Equity Shares = Equity capital (Rs. 10) / EPS

Number of Equity Shares = Rs. 8,00,000 / 10 = 80,000 shares

Now, we can calculate EPS for both scenarios:

(i) Increase by 20%:

EPS = (EAT / Number of Equity Shares) = (1,04,000 / 80,000) = Rs. 1.30 per share

(ii) Decrease by 20%:

EPS = (EAT / Number of Equity Shares) = (56,000 / 80,000) = Rs. 0.70 per share

Other Questions