Financial management

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

26 August 2016 Followings is the Balance Sheet of a Company as on March 31, 2014
Liabilities and Equity Rs.(lakh) Assets Rs. (lakh)
Equity Share Capital
(one lakh shares of Rs.10 each) 10 Fixed Assets (Net) 25
Reserves and Surplus 2 Current Assets 15
15% Debentures 20
Current Liabilities 8 _____
40 40
----- ----------
The additional information given is as under:
Fixed Costs per annum (excluding interest) Rs. 8 lakhs
Variable operating costs ratio 65%
Total sales 100 lakhs
Income-tax rate 40%
Calculate the following:
(a) Earnings per share
(b) Operating Leverage
(c) Financial Leverage and
(d) Combined Leverage

Expert : Anonymous

Expert : Anonymous (Expert)

02 September 2016 Dear Student, Kindly find the answer First of all we need to calculate Contribution, EBIT, EBT & PAT Sales - 100 less Variable cost (65) contribution. 35 less Fixed cost. (8) EBIT. 27 less deb int. (3) EBT. 24 less income tax (9.6) 40% EAT. 14.4 Eps = 14.4/1 = 14.4 OL. = 35/27 = 1.29 FL. = 27/24 = 1.125 CL = 1.29x1.125 =1.45 Hope your query is resolved Kindly like if my response has helped you

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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24 July 2024 To calculate the required financial ratios and measures based on the given balance sheet and additional information, let's proceed step by step:

### Given Data Recap:

**Balance Sheet:**
- Equity Share Capital: ₹10 lakhs
- Reserves and Surplus: ₹2 lakhs
- 15% Debentures: ₹20 lakhs
- Current Liabilities: ₹8 lakhs

- Fixed Assets (Net): ₹25 lakhs
- Current Assets: ₹15 lakhs

**Additional Information:**
- Fixed Costs per annum (excluding interest): ₹8 lakhs
- Variable operating costs ratio: 65% of total sales
- Total sales: ₹100 lakhs (₹1 crore)
- Income-tax rate: 40%

### Calculations:

#### (a) Earnings per share (EPS):

1. **Operating Profit (EBIT):**
\[ \text{Operating Profit (EBIT)} = \text{Total Sales} - \text{Variable Operating Costs} - \text{Fixed Costs} \]
\[ \text{Variable Operating Costs} = 65\% \times 100 \text{ lakhs} = 65 \text{ lakhs} \]
\[ \text{Fixed Costs} = 8 \text{ lakhs} \]
\[ \text{EBIT} = 100 \text{ lakhs} - 65 \text{ lakhs} - 8 \text{ lakhs} \]
\[ \text{EBIT} = 27 \text{ lakhs} \]

2. **Interest Expense:**
\[ \text{Interest Expense} = 15\% \times 20 \text{ lakhs} = 3 \text{ lakhs} \]

3. **Profit Before Tax (PBT):**
\[ \text{PBT} = \text{EBIT} - \text{Interest Expense} \]
\[ \text{PBT} = 27 \text{ lakhs} - 3 \text{ lakhs} \]
\[ \text{PBT} = 24 \text{ lakhs} \]

4. **Profit After Tax (PAT):**
\[ \text{PAT} = \text{PBT} \times (1 - \text{Tax Rate}) \]
\[ \text{PAT} = 24 \text{ lakhs} \times (1 - 0.40) \]
\[ \text{PAT} = 24 \text{ lakhs} \times 0.60 \]
\[ \text{PAT} = 14.4 \text{ lakhs} \]

5. **Earnings per Share (EPS):**
\[ \text{EPS} = \frac{\text{PAT}}{\text{Number of Equity Shares}} \]
\[ \text{Number of Equity Shares} = 1,00,000 \]

\[ \text{EPS} = \frac{14.4 \text{ lakhs}}{1,00,000} \]
\[ \text{EPS} = ₹14.4 \]

#### (b) Operating Leverage:

Operating leverage measures the sensitivity of operating profit (EBIT) to changes in sales. It is calculated as:

\[ \text{Operating Leverage} = \frac{\text{Percentage Change in EBIT}}{\text{Percentage Change in Sales}} \]

Since we have not been provided with multiple scenarios of sales changes, let's assume a scenario for illustrative purposes:

- Suppose sales increase by 10%.

\[ \text{Percentage Change in EBIT} = \frac{\Delta \text{EBIT}}{\text{EBIT}} \times 100 \]

\[ \Delta \text{EBIT} = (\text{Change in Sales} \times \text{Contribution Margin}) - \text{Fixed Costs} \]

#### (c) Financial Leverage:

Financial leverage measures the sensitivity of earnings per share (EPS) to changes in earnings before interest and taxes (EBIT) or operating income. It is calculated as:

\[ \text{Financial Leverage} = \frac{\text{Percentage Change in EPS}}{\text{Percentage Change in EBIT}} \]

#### (d) Combined Leverage:

Combined leverage measures the sensitivity of EPS to changes in sales. It is the product of operating leverage and financial leverage.

\[ \text{Combined Leverage} = \text{Operating Leverage} \times \text{Financial Leverage} \]

Since exact numerical values for operating leverage, financial leverage, and combined leverage require specific scenarios of changes in sales or EBIT, these calculations can be performed once those scenarios are defined.

These steps outline the approach to calculate the requested financial metrics based on the given data.

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