Advanced financial management Chapter 1 Leverages 1.

. Find degree of operating leverage if 5,000 units are sold Particulars Frim A Sale price unit (Rs.) 20 Variable cost per unit(Rs.) 6 Fixed operating cost (Rs.) 80,000

Frim B 32 16 40,000

Frim C 50 20 2,00,000

Frim D 70 50 NIL

2. A firms sales variable cost and fixed costs are Rs. 75 lacs, Rs 42 lacs and Rs 6 lacs, it has 9% DEBT =45lacs and its equity was Rs. 55 lacs. Find: A. ROI B. Asset turnover C. Degree of operating , Financial and combined leverage D. The new EBIT if sales Rs. 50 lacs E. Level 3. Prepare income statement (Tax rate is 35% and comment) Particulars Frim A Frim B Frim C % of variable cost to sales 66 2/3 % 75% 50% Interest 200 300 1,000 Degree of operating leverage 5 6 2 Degree of financial leverage 3 4 2 4. Find the degree of operating, financial and combined leverages and the combinations that give highest and lowest EPS values if values if the installed capacity -1200 units, actual production -66% of installed capacity, the selling price is Rs.15 per unit, the variable cost Rs. 10 per unit, the fixed cost in situation 1 Rs.1,000, situation 2 Rs. 2,000, situation 3 Rs. 3,000 Financial Plans Particulars 1 2 3 Equity(Rs.) 5000 7500 2500 12% DEBT (Rs.) 5000 2500 7500 5. X ltd has to raise funds of 2 lacs (Tax 35%) equity shares are of Rs. 10 each issued at a premium of Rs. 10 . each ,expected EBITRs. 80,000. Determine for each Plan:A. Earnings per share B. Financial break-even point C. The EBIT range for indifference Financial Plans A B C Equity 100% 50% 50% 8% Debt NIL 50% NIL 8% pref NIL NIL NIL

6. X ltd plans to expand its assets by 50% and has to choose between equity or 6% DEBT. The current balance sheet Liabilities Amount(Rs.) Assets Amount(Rs.) 5% DEBT 4,00,000 Total assets 20,00,000 Equity 10,00,000 Earned surplus 6,00,000 Current income statement Particulars Amount(Rs.) Sales 60,00,000 Total costs (excluding interest) (53,80,000) EBIT 6,20,000 Less: Interest (20,000) EBT 6,00,000 Less: Taxes (2,10,000) Net income 3,90,000 The P/E ratio-10 times for DEBT and 12 times for equity financing. New equity shares can be sold @ Rs. 33 1/3 A. Assuming EBIT @ 10% of sales calculate EPS at sales of Rs. 20 lacs, Rs. 40 Lacs, Rs. 80 lacs&Rs. 100 lacs B. Calculate the market price of equity shares at the different sales values. C. Suggest the form of financial to maximise the market price of the equity shares.

7. Current balance sheet of ABC ltd Liabilities Amount(Rs.) Assets Amount(Rs.) Equity@10 800,000 Fixed assets 10,00,000 10% DEBT 6,00,000 Current assets 9,00,000 Retained earnings 3,50,000 Current liabilities 1,50,000 19,00,000 19,00,000 Current income statement of ABC Ltd Particulars Amount(Rs.) Sales 3,40,000 Operating expenses (including deprecation Rs. 60,000) (1,20,000) EBIT 2,20,000 Less: Interest (60,000) EBT 1,60,000 Less: taxes (56,000) Net Income 1,04,000 A. Determine all leverages B. Assuming total assets to be the same what will be the EPS if sales change by 20%

8. Current balance sheet of ABC ltd Liabilities Amount(Rs.) Assets Amount(Rs.) Equity@10 60,000 Fixed assets 1,50,000 10% DEBT 80,000 Current assets 50,000 Retained earnings 20,000 Current liabilities 40,000 2,00,000 2,00,000 Asset turnover 5times fixed costs Rs. 1,00,000& variable costs 40%. Taxes 35% Calculate: A. All leverages B. The EBIT if the eps is Re 1, Rs. 3 and zero 9. X ltd has 20,000 equity shares @ 50 each. A new project cost Rs. 5,00,000 which can be financed by equity or 105 DEBT, with sales at an optimistic level of Rs. 12,00,000 or a pessimistic level of Rs. 9,00,000 with an additional fixed cost Rs. 1,00,000 which financial plan will maximise EPS The current income statement is as follows Particulars Sales Less variable cost Contribution Less fixed costs EBT Less interest EBT Less taxes EAT EPS Amount(Rs.) 8,00,000 (2,40,000) 5,60,000 (3,00,000) 2,60,000 (NIL) 2,60,000 (91,000) 1,69,000 8.45

10. X ltd plans to expand its assets by 50% which will increase sales by Rs. 3 lacs with a EBIT of 25% Plan 1: issue 10% DEBT Plan 2: issue 10% DEBT for half the required amount and for the balance issue equity shares @25% premium Plan 1: issue equity shares @ 25% premium. Current balance sheet of X ltd Liabilities Amount(Rs.) Assets Amount(Rs.) Equity@10 4,00,000 Assets 12,00,000 8% DEBT 3,00,000 Retained earnings 2,00,000 Current liabilities 3,00,000 12,00,000 12,00,000 3

Current income statement of X Ltd Particulars Amount(Rs.) Sales 19,00,000 Operating expenses (including deprecation Rs. 60,000) (16,00,000) EBIT 3,00,000 Less: Interest (24,000) EBT 2,76,000 Less: taxes (96,600) Net Income 1,79,400 EPS 4.485 A. Find the number of equity shares issued as per plan 3 B. Find indifference point between the plans if the P/E remains constant for plan 3, but reduces to 6 times for plan 1 or 2 C. Find the market price of the equity shares 11. Sales 1 million pens @ Rs. 5. Variable cost Rs. 3 per pen, fixed costs Rs. 15 lacs , assets turnover 5 times and 40% assets financed by 8% DEBT, tax 35% there is a proposal to reduce selling price to Rs. 4.5 which could increase sales volume by 40% asset turnover 6.3 times, DEBT equity ratio 50% with interest on DEBT increasing by 1% Should the plan be implemented? What if fixed costs increase by 15%? 12. X ltd is planning to by either of 2 companies , both having assets of Rs. 15 lacs but they prefer a frim with lower risk Current operating statements Sales Less : cost of goods sold Less: selling expenses Less: administrative expenses Less: deprecation EBIT Variable cost of goods sold Variable selling expenses Total variable cost A ltd (Rs.) 30,00,000 22,50,000 2,40,000 90,000 1,20,000 3,00,000 9,00,000 1,50,000 10,50,000 B ltd (Rs.) 30,00,000 22,50,000 2,40,000 1,50,000 90,000 2,70,000 18,00,000 1,50,000 19,50,000

Prepare operating statements for both firms, assuming sales increase by 20% and calculate all the leverages. 13. X ltd has the following capital structure (Lacs) Particulars Amount(Rs.) Equity shares @100 20 Retained earning 10 9% preference shares 12 7% debentures 8 Total 50 The EBIT is 12 % of capital employed. Expansion requires Rs. 25 lacs by A. Issue of 20,000 equity shares @ premium of Rs. 25 per share (P/E 15) B. Issue of 10% preference shares (P/e 12) 4

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C. Issue of 8% debentures (P/E 10) Recommend best plan if tax rate 35% X ltd has 2 financing plans (Tax 35%) Sources of funds Plan 1 Plan 2 Equity 15,000shares 30,000 Shares 12% pref shares of Rs. 100 each 25,000 shares NIL Dentures Rs. 5 lacs @10% Rs. 15 lacs @11% A. Determine the indifference point & financial B.E.P for both plans. B. Which plan has a greater financial risk, why? C. Indicate the EBIT range for both plans. D. If the best exceeds Rs. 12, 50,000 which plan is recommended? Why? A frim needs Rs. 1,00,000 for expansion & has 3 plans (tax 35%) Sources of funds Plan 1 Plan 2 Plan 3 Equity share @ Rs. 25 100% 30% 50% 11% pref shares NIL 10% 20% 10%DEBT NIL 60% 30% A. Find the financial B.E.P for each plan B. Which plan has greater financial risk? Why? A frim requires Rs. 30 lacs for expansion has 4 plans A. Either 100% equity or 50% equity with 50%, 10% DEBT. B. Either 100% equity or 13% pref shares with equity (1:2) C. Either 100% equity or 13% pref shares (dividend tax 10%), 10% DEBT with equity equally D. Either equity with 10% debt (2:1) or 13% pref shares, 10% Debt with equity (5:4:6). E. Determine indifference point for each plan if tax 35% and face value of equity shares @ Rs. 100. A frim has 15 lac equity shares and 5 lac pref shares having dividend of Rs. 1.2 each. The current EBIT is Rs. 7.2 million and the current EPS is Rs. 2. The frim requires Rs. 10 million for expansion. It has the following 2 plans Plan 1 : issue equity shares @10 each Plan 2: issue 155 debt Calculate: A. The indifference point B. The plan which maximises EPS?

18. X ltd has a target ROE of 20%, the debt equity ratio is 1.2. the preference tax cost of debt is 12% , tax35%. What ROI should the company plan to earn? 19. X ltd has 8% debt, tax 50% , ROI 14%, target ROE 15% what financial leverage ratio should the company adopt? 20. X ltd has average cost of debt as 9%, tax 60%, ROI 12% the financial leverage ratio 0.6 times. What is the ROE for the company?

21. Current balance sheet of ABC ltd Liabilities Amount(Rs.) Assets Amount(Rs.) Equity@10 18,00,000 Fixed assets 30,00,000 10% DEBT 16,00,000 Current assets 29,00,000 Retained earnings 13,50,000 Current liabilities 11,50,000 59,00,000 59,00,000 Current income statement of ABC Ltd Particulars Amount(Rs.) Sales 23,40,000 Operating expenses (including deprecation Rs. 60,000) (21,20,000) EBIT 12,20,000 Less: Interest (1,60,000) EBT 10,60,000 Less: taxes (3,71,000) Net Income 6,89,000 C. Determine all leverages D. Assuming total assets to be the same what will be the EPS if sales change by 50%