Amol Ltd. and ‘Sagar’ Ltd. are identical in every respect except Capital Structure. Amol Ltd does not Employ Debts in its Capital Structure whereas Sagar Ltd. Employes 12% Debentures amounting to Rs 10 lakhs. The following information is given for Gamma Limited.

Mahalaxmi Limited is setting up a project with a capital outlay of Rs 60,00,000. It has two alternatives in financing the project cost. If Sales rises DOL reduces and EPS increase.

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Thus, 5% changes in sales will cause a 20% change in PAT/EPS. Degree of___is the ratio of percentage change in gaming per share to the percentage change in sales. The tendency of profit after tax to vary disproportionately with the fixed cost. This is to inform that, many instances were reported by general public where fraudsters are cheating general public by misusing our brand name Motilal Oswal.

Variable cost is variable and fixed cost is fixed in total. Annual sales of a company is Rs. 60,00,000. Sales to Variable Cost ratio is 150% and Fixed Cost other than interest is Rs. 5,00,000 p. Company has 11% debentures of Rs. 30,00,000.

Rs. 15 lakhs in equity shares of Rs. 100 each and the balance in 8% debentures. In the case of ABC Ltd, the % increase in EBIT is 80% and % increase in sales is 50%. This relationship between % change in EBIT and % change in sales is known as Degree of Operating leverage. From the following data of Abhishek Ltd., compute the operating leverage, financial leverage, combined leverage. If contribution is less than fixed cost, operating leverage will be favorable and vice versa. In the first year, if EBIT was 20% higher, the EBT would also be 20% higher due to zero debt.

Leverages – Financial and Strategic Management MCQ

Financial leverage is a measure of the relationship between the EBIT and the EPS. TheDFL reflects the effect of change in EBIT on the level of EPS. It is defined as % change in EPS divided by the % change in EBIT. In simple terms, leverage may be defined as the % change in one variable divided by the % change in some other variable. Here, the numerator is the dependent variable and the is the independent variable. The capital structure of a company consists of the following securities.

• The firm has ₹ 30,00,000 in debt that costs 10% annually.
• It has two alternatives in financing the project cost.
• The higher growth shown in profits due to leverage is more due to the lower base effect.
• Financial leverage plays a major role in deciding the optimum capital structure.
• In fact, if banks write off these loans it may actually impel companies to continue to borrow recklessly and create moral hazard.

The tendency of sales to vary disproportionately with the fixed cost. Operating leverage is directly__ to business risk. In the above example, the company financial leverage is zero if has zero debt in the first year but takes on debt in the second year. As a result of the debt, the company incurs an interest cost in the second year.

LEVERAGE

Calculate the Percentage of change in earnings per share if sales increased by 5%. Calculate the financial leverage taking EBIT level under base. Rs.10% Preference Share Capital1,00,000Equity Share Capital (Rs. 10 Shares)1,00,00012% Debenture75,000The amount of operating profit is Rs. 69,000. The company is in 35% tax bracket. The overall debt divided by shareholder equity. This borrowing allows for the multiplication of gains and losses.

Under NOI Approach, overall cost of capital remains same. All earnings are paid out as Dividends at year end. Both the companies earn 20% Before Interest and Taxes on their Total Assets of Rs 30 lakhs. If Fixed cost rises DOL rises and EPS falls. Therefore fixed cost if preferable on lower side. Calculate the Percentage of change in earnings per share, if sales increased by 5%.

₹10% Preference Share Capital1,00,000Equity Share Capital (₹ 10 Shares)1,00,00012% Debenture75,000The amount of operating profit is ₹ 69,000. The company is in the 35% tax bracket. You are required to calculate the financial leverage of the company. A firm’s degree of total leverage is equal to its degree of operating leverage its degree of financial leverage .

To understand DFL, let us look at a scenario where EBIT moves up by 20% as under.. Shubham Ltd. retains Rs 7,50,000 out of its Current Earnings. The expected Rate of Return to the Shareholders, if they had invested the funds elsewhere is 10%. The Brokerage is 3% and the Shareholders come in 30% Tax Bracket.

MCQ for CA Intermediate FMECO – SECTION A – FINANCIAL MANAGEMENT – Chapter 6 – FINANCING DECISIONS – LEVERAGE

All of the above are correct methods to calculate the degree of financial leverage . The Highly risky situation as it consists of large fixed costs. Degree of Financial Leverage calculates the sensitivity of the profits of the company to changes in the company’s debt levels and interest costs. _________ is the level of EBIT which covers all fixed financing costs of the company. Equity shareholders would demand higher return.

It is created Due to Fixed Expenses. Higher the leverage higher the risk. Calculate the Return-on-equity for the company and indicate its segments due to the presence of Preference Share Capital and Borrowing . Calculate the different type of leverages for the company. Problem No. 4] The following data relate of company XYZ Ltd.

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If the fixed costs are higher, the firm’s operating leverage and its operating risks are higher. If operating leverage is high, it means that the break-even point would also be reached for a very marginal drop in sales. The term leverage refers to a relationship between two interrelated variables. In a business firm, these https://1investing.in/ variables may be costs, output, sales, revenue, EBIT, Earning per share etc. Thus, leverage reflects the responsiveness or influence of one variable over some other financial variables. In leverage analysis, the emphasis is on the measurement of the relationship of two variables rather than on measuring these variables.

You are Required to Compute the Weighted Average Cost of Capital of the company. If DOL is 2 it means that 10% change in Sales will bring 20% change in EBIT. If Fixed cost per unit is given in the question then number of units at which it is calculated must also be given. Tendency of Disproportionate change is called LEVERAGE.

There are two firms A and B which are identical except A does not use any debt in its capital structure while B has Rs 8,00,000, 9% Debentures in its Capitals Structure. Both the firms have Earnings Before Interest and Tax of Rs 2,60,000 p. and the Capitalization Rate is 10%. Assuming the Corporate Tax of 30%, Calculated the Value of these firms according to MM Hypothesis. High financial leverage shows a higher burden of interest cost consequently higher financial risk. As QPR Ltd. has higher financial leverage hence it has high financial risk as compared to ABC Ltd. Low operating leverage and high financial leverage.

Use of funds with a contribution cost in order to increase earnings before interest and taxes. Use of funds with a product cost in order to increase earnings per share. Of shares9,0009,0009,000EPS120Perform reverse working downward to upward. If there is a 10% increase in sale, EBIT increase by 35% (10 × 3.5).

Firm A has a higher operating leverage. D Ltd. has high operating leverage and hence its business risk is higher as compared to other companies. High operating leverage shows a higher burden of fixed cost. With the increase in fixed cost operating leverage diminishes. From a valuations perspective, the preference is always for the companies with the lower leverage. Markets are averse to debt and you will typically find that companies with lower levels of debt tend to get better ROEs and also better P/E ratios in the market.

Financial leverage plays a major role in deciding the optimum capital structure. The capital structure is concerned with the raising of long-term funds both from the shareholders and through debt. A financial manager has to decide about the ratio between fixed cost funds and equity share capital.