Calculate operating and financial leverage under situations A, B and C and financial plans 1, 2 and 3 respectively from the following information and find which plan will give the highest value and the least value. Insta

Answer 6(b) Operating Leverage (Amount in ₹) A B C Sales (S) - Variable Cost (VC) (i.e ₹5 x 800) 4,000 4,000 4,000 Less: Fixed Cost 1,000 2,000 3,000 Earnings before Interest and Tax (EBIT) 3,000 2,000 1,000 Degree of Operative Leverage = (S - VC)/EBIT 1.33 2 4 Financial Leverage Situation A 1 2 3 Earnings before Interest and Tax (EBIT) 3,000 3,000 3,000 Less: Interest (Plan 1: 5000*0.12=600; Plan 2: 2500*0.12=300; Plan 3: 7500*0.12=900) 600 300 900 Earnings before Tax (EBT) 2,400 2,700 2,100 Financial Leverage (EBIT/EBT) 1.25 1.11 1.43 Situation B 1 2 3 EBIT 2,000 2,000 2,000 Less: Interest 600 300 900 EBT 1,400 1,700 1,100 Financial Leverage 1.43 1.18 1.82 Situation C 1 2 3 EBIT 1,000 1,000 1,000 Less: Interest 600 300 900 EBT 400 700 100 Financial Leverage 2.5 1.43 10