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    3A. Capital Structure Leverages Numerical Marked

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    Sundeep Moganti
    This document contains 13 numerical problems related to capital structure and leverages. The problems cover concepts such as preparing income statements, calculating operating leverage, financial leverage and combined leverage, evaluating financing options to maximize shareholder wealth, and determining the percentage increase in sales needed to achieve a target increase in EBIT.

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    3A. Capital Structure Leverages Numerical Marked

    Uploaded by

    Sundeep Moganti
    40 views3 pages
    This document contains 13 numerical problems related to capital structure and leverages. The problems cover concepts such as preparing income statements, calculating operating leverage, financial leverage and combined leverage, evaluating financing options to maximize shareholder wealth, and determining the percentage increase in sales needed to achieve a target increase in EBIT.

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    This document contains 13 numerical problems related to capital structure and leverages. The problems cover concepts such as preparing income statements, calculating operating leverage, financial leverage and combined leverage, evaluating financing options to maximize shareholder wealth, and determining the percentage increase in sales needed to achieve a target increase in EBIT.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    40 views3 pages

    3A. Capital Structure Leverages Numerical Marked

    Uploaded by

    Sundeep Moganti
    This document contains 13 numerical problems related to capital structure and leverages. The problems cover concepts such as preparing income statements, calculating operating leverage, financial leverage and combined leverage, evaluating financing options to maximize shareholder wealth, and determining the percentage increase in sales needed to achieve a target increase in EBIT.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    CAPITAL STRUCTURE & LEVERAGES – NUMERICAL

    1) Following details were extracted from Gama Ltd.


    Financial leverage 2:1, Operating leverage 3:1,
    Interest charges p.a. Rs. 20 lakhs, Tax rate 40%,
    Variable cost 60% of sales.
    Prepare the income statement of the company

    2) Sharp Ltd. is planning diversification which needs additional funds of rupees one crore. Following options are given –
    a) 12% Debt issue (expected P/E ratio 6 times) or
    b) Issue of equity shares with premium at the rate of 25% (expected P/E ratio 8 times)
    If the expansion plan is implemented, it would result into sales of Rs. 8 crore. The COGS and Operating cost would
    be 90% of Sales. Tax rate is 50%. Existing capital structure of the company is given below –
    Equity shares of Rs. 10 each Rs. 1,00,00,000
    Retained Earnings Rs. 60,00,000
    11 % Debentures Rs. 40,00,000
    Total Rs. 2,00,00,000

    3) The following data relates to Robin Ltd.


    Operation Profit (EBIT) Rs. 30,00,000, Net Profit (PAT) Rs. 13,50,000
    Operating Fixed Costs Rs. 22,50,000, Tax Rate 40%
    Required:
    (i) Prepare the Income Statement of Robin Ltd.
    (ii) If the company wants to increase its net profit by 40%, how much should be the percentage rise in EBIT?

    4) From the following data, prepare income statement of Donora Ltd.

    Operating Leverage 2.50 times Financial Leverage 3.00 times


    EPS Rs. 30 Current Market Price Rs. 225
    Tax Rate 33.3333% No. of Eq. Shares 20000

    5) X Ltd. earns operating profit of Rs. 100,000. Its capital structure contains 10% Loan Rs. 500,000 and its WACC is
    12.50%. Find out value of the firm and cost of equity, when –
    a) debt is increased by Rs. 200,000
    b) debt is reduced by Rs. 200,000

    6) Compute point of indifference where EPS shall be same for Plan A and Plan B, from the following data –

    Existing 20 lakh shares and 8% Debentures of Rs. 50 lakhs. Additional funds needed Rs. 100 lakhs through –
    Plan A) Issue Equity Capital Rs. 100 lakhs issued at Rs. 12.50 per share, Face Value Rs. 10 per share
    Plan B) Issue 14% Debentures of Rs. 100 lakhs. Tax rate 30%.

    7) Sales of Max Ltd. are Rs. 30 crores and EBIT is 15% of sales. The Equity Capital is Rs. 12 crores, 13% Preference
    Capital Rs. 5 crores and 15% Debentures Rs. 6 crores. Combined leverage is 3 times. Compute Operating leverage

    ACE ACADEMY (7722031188 / 9822558713) Page 38


    Capital Structure & Leverages
    8) The existing capital structure of Pascal Ltd., is as under –

    Equity shares of Rs. 100 each Rs. 40,00,000


    Retained Earnings Rs. 10,00,000
    8 % Preference shares Rs. 15,00,000
    12 % Debentures Rs. 35,00,000

    The company earns 15% on capital employed and income tax rate is 20%. The company needs Rs. 50,00,000 to
    finance its expansion programme for which it is considering the following alternatives -

    I. Issue Equity shares of Rs 100 each at 100% premium


    II. Issue of 10 % Preference shares
    III. Issue of 15 % Debentures

    It is estimated that the P/E ratios in the cases of Equity, Preference and Debentures financing would be 15, 14 and
    12 respectively. Which of the above alternatives would you consider to be the best?

    9) The following information is available for Sush Ltd.

    Particulars Rs.
    Sales 500,000
    (-) Variable Cost 100,000
    Contribution 400,000
    (-) Fixed Cost 200,000
    EBIT 200,000
    (-) Interest 120,000
    PBT 80,000

    Compute the following using the concept of Leverages:

    a) What percent will taxable income increase, if the sales increase by 20%?
    b) What percent will EBIT increase, if the sales increase by 15%?
    c) What percent will taxable income increase, if the EBIT increase by 10%?
    d) What percent rise in Sales is needed to increase the EPS by 18%?
    e) If EBIT increased by 25%, what was the percent rise in Sales?
    f) What percent rise in operating profit is needed to double the EPS?

    10) Given below is the Balance Sheet of Money Ltd.

    Liabilities Rs. Assets Rs.


    Equity Capital (FV Rs. 10) 160,000 Fixed Assets 300,000
    10% Debentures 120,000
    Retained Earnings 80,000 Current Assets 100,000
    Current Liabilities 40,000
    Total 400,000 Total 400,000
    Total assets turnover ratio 2.50 times, Fixed costs Rs. 200,000, Contribution is 60% and income tax rate is 50%.

    a) Compute Operating leverage, Financial leverage and Combined leverage


    b) Determine the level of EBIT if the EPS is Rs. 10
    c) Find Financial Breakeven Point

    ACE ACADEMY (7722031188 / 9822558713) Page 39


    Capital Structure & Leverages
    11) Rustom Industries Ltd has an equity share capital of Rs. 50 lakhs (face value Rs. 100). To meet the new expansion
    program the company wants to raise Rs. 50 lakhs and has the following options –

    a) Issue equity share @ 100% premium.


    b) Raise funds evenly through equity shares at 25% premium and borrowings @ 15 % p.a.
    c) Finance entirely through borrowing @ 20.00 %
    d) Raise Rs. 15 lakhs from equity shares at 50% premium and balance 10 % Preference capital

    Currently, EBIT of Rustom Industries is Rs. 20 lakhs and the same varies evenly with investments. The company has
    a tax of 40%. Suggest a suitable plan for Rustom Industries.

    12) Simplex Ltd is considering an expansion program which is expected to cost Rs. 10,00,000. The company can
    finance either through debt or equity. Its current financing plan is given as under:

    Particulars Amount (Rs.)


    Equity Capital (50,000 shares of Rs. 10 each) 500,000
    Reserves and Surplus 200,000
    Debt (10%) 300,000
    Total 10,00,000

    The latest income statement reveals the following information:

    Particulars Amount (Rs.)


    Sales 64,00,000
    (-) Total Costs (59,00,000)
    EBIT 500,000
    (-) Interest (30,000)
    EBT 470,000
    (-) Income Tax @ 50% (235,000)
    Earnings After Tax 235,000

    The expansion program is expected to generate additional sales of Rs. 16,00,000 with a return of 15% on sales
    before interest and taxes. If the expansion is financed through a debt, the rate of new debt will be 12% and the price
    earnings ratio will be 4 times. If the expansion program is financed through equity shares, i.e. the new shares can be
    sold at a price of Rs. 40 and the price-earnings ratio will be 5 times. Which form of financing should the company
    choose; if the objective of financial management in the company is maximization of shareholder’s wealth?

    13) The following information related to Zen Company Ltd. for the year ended 31st March, 2013 are available to you:

    Total Sales Rs. 10 lakhs, Total Fixed Cost Rs. 1.50 lakhs, Contribution margin 30%, and Existing Loan Rs. 8 lakhs
    @ 10% interest. Compute Operating Leverage, Financial Leverage and Combined Leverage. If Zen Ltd. wants to
    double its current EBIT, by what percent its sales should increase?

    ACE ACADEMY (7722031188 / 9822558713) Page 40

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