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FINANCIAL MANAGEMENT - QUESTION PAPER REVIEW - 5 & 10 MARKS

(PROBLEMS - Unit II - Capital Structure & Leverages)

A firm sells its only product at Rs. 12 per unit. its variable cost is Rs. 8 per unit. present
sales are 1000 units. calculate the operating leverage in each of the following situations
a) When fixed cost is Rs. 1000
b) When fixed cost is Rs. 1200
c) When fixed cost is Rs. 1500

A company's capital structure consists of Rs. 1000000 (shares of Rs. 100 each) equity
November
capital and Rs. 1000000, 10% debentures. The sales increased by 20% from 100000 units
2018
to 120000 units; the selling price is Rs. 10 per unit; variable cost amount to Rs. 6 per unit
and fixed expenses amount to Rs. 2,00,000. the rate of income tax is assumed to be 50%.
Calculate
The percentage increase in EPS
The degree of financial leverage at 1,00,000 units and 1,20,000 units
The degree of operating leverage at 1,00,000 units and 1,20,000 units
Comment on the risk position of the firm
A company has earning before interest and taxes of Rs. 1,00,000. it expects a return on
investment at the rate of 12.5%. you are required to find out the total value of the firm
according to M.M Theory
A company expects a net income of Rs. 80,000. it has Rs. 2,00,000 debentures at 8%. the
equity capitalization rate of the company is 10%. Calculate the value of the firm and
overall capitalization rate according to the Net Income Approach. (Ignore Income Tax)
Equity share capital Rs. 1,00,000
10% preference share capital Rs. 1,00,000
8% Debentures Rs. 1,25,000
November
The present EBIT is Rs. 50,000. calculate the financial leverage assuming that the
2017
company is in 50% tax bracket.
There are two firms X and Y which are exactly identical except that firm X does not use
any debt in the financing while firm Y has Rs. 1,00,000 5% debentures. Both the firms
have EBIT of Rs. 25,000. Equity capitalization rate is 10% corporate tax rate 50%.
Calculate the value of the firm
A firm has sales of Rs. 10,00,000 variable cost of Rs. 7,00,000 and fixed costs of Rs.
2,00,000 and debt of Rs. 5,00,000 at 10% rate of interest. What are the operating
leverage, financial leverage and combined leverage? if the firm wants to double up its
EBIT, how much of rise in sales would be needed on a percentage basis.

Two firms X and Y are identical except in the method of financing. Firm X has no debt
while firm Y has Rs. 2,00,000 5% debentures in financing. both the firms have Net
Operating Income (EBIT) of Rs. 50,000 and equity capitalization rate of 12.5%. The
corporate tax rate is 50%. Calculate the vale of the firm using MM approach

November The following data are available for R and S ltd


2016 Selling Price - Rs. 120 per unit
Variable cost - Rs. 70 per unit
Fixed cost - Rs. 2,00,000
What is operating leverage when R and S ltd produces and sells 6000 units?
What is the percentage change that will occur in the EBIT, if the output increases by 5%
Calculate revised operating leverage
FINANCIAL MANAGEMENT - QUESTION PAPER REVIEW - 5 & 10 MARKS
(PROBLEMS - Unit II - Capital Structure & Leverages)

Blue sky Ltd. has an EBIT of Rs. 2,00,000. The cost of debt is 10% and the outstanding
debt is Rs. 9,00,000. The overall capitalization rate (Ke) is 12.5%. Calculate the total value
of the firm (V) and equity capitalization rate (ke)

The capital structure of Hindustan Corporation Ltd. consists of equity share capital of Rs.
10,00,000 (shares of Rs. 100 par value) and Rs. 10,00,000 of 10% debentures. sales has
increased from 1,00,000 units to 1,20,000 units, the selling price is Rs. 10 per unit.
variable cost amounts to Rs. 6 per unit and fixed expenses amount to Rs. 2,00,000. The
income tax is assumed to be 50%. You are required to calculate the following
a) The percentage increase in EPs
b) The degree of financial leverage at 1,00,000 units and 1,20,000 units
c) The degree of operating leverage at 1,00,000 units and 1,20,000 units
d) Comment on the risk position of the firm

ABC Ltd. has an EBIT of Rs. 1,00,000. The cost of debt is 10% and outstanding debt
amount to Rs. 4,00,000. Presuming the overall capitalization rate is 12.5%. Calculate the
total value of the firm and the equity capitalization rate

A company has a choice of the following four financial plans. You are requested to
calculate the financial leverage in each case
PLAN - A PLAN - B PLAN - C PLAN - D
Equity Capital 3000 2000 1000 500
Debt 1000 2000 3000 3500
EBIT 400 400 400 400
November
2015
Interest @ 10% on debt in all cases

B Ltd. has a share capital or Rs. 1,00,000 divided into shares of Rs. 10 each. It has a major
expansion programme requiring and investment of another Rs. 50,000. The management
is considering the following alternatives for raising this amount
Issue of 5000 equity shares of Rs. 10 each
Issue of 5000, 12% preference shares of Rs. 10 each
Issue of 10% debenture of Rs. 50,000
The company's present EBIT are Rs. 40,000 per year. you are required to calculate the
effect of each of the above modes of financing on the earning per share presuming EBIT
increases by 10%

Compute the operating, financial and combined leverages from the given data
Sales 50,000 units at Rs. 12 per unit
Variable cost at Rs. 8 per unit
Fixed cost Rs. 90,000 (including 10% interest on Rs. 2,50,000)

The capital structure of Hindustan Corporation Ltd. consists of equity share capital of Rs.
November 10,00,000 (shares of Rs. 100 par value) and Rs. 10,00,000 of 10% debentures. sales has
2014 increased from 1,00,000 units to 1,20,000 units, the selling price is Rs. 10 per unit.
variable cost amounts to Rs. 6 per unit and fixed expenses amount to Rs. 2,00,000. The
income tax is assumed to be 50%. You are required to calculate the following
a) The percentage increase in EPs
b) The degree of financial leverage at 1,00,000 units and 1,20,000 units
c) The degree of operating leverage at 1,00,000 units and 1,20,000 units
Comment on the risk position of the firm