The net sales of ABC Ltd. is ₹ 30 crore. Earning before interest and tax of the company as a percentage of net sales is 15%. The capital employed comprise of: Equity— ₹ 12 crore 13% cumulative pref. shares ₹ 5 crore Debe

CS Professional · Financial, Treasury and Forex Management · PYQS · December 2017
The net sales of ABC Ltd. is ₹ 30 crore. Earning before interest and tax of the company as a percentage of net sales is 15%. The capital employed comprise of: Equity— ₹ 12 crore 13% cumulative pref. shares ₹ 5 crore Debentures @ 15% ₹ 6 crore Calculate operating leverage of the company given that combined leverage is 3.

Answer & Explanation:

Calculation of operating leverage in crore EBIT (15% of ₹ 30 crores) 4.50 Less: Interest on debt (@15% on ₹ 6 crores) 0.9 EBT 3.60 Preference dividend @ 13% of ₹ 5 crores 0.65 Degree of Financial leverage = EBIT/(EBIT - Interest - Preference dividend) = 4.50 crores / (4.50 crores - ₹ 0.9 crores - ₹ 0.65 crores) = 4.50 crores / 2.95 crores = 1.525 Combined leverage = DOL × DFL DOL = Combined leverage/DFL = 3/1.525 = 1.967

Topics: Leverage Analysis

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