(^90) Financial Management
Solution: Calculation of leverage :
Operating leverage = Earning before Interest & Tax
Contribution
P Ltd = RsRs..^300150 lakhslakhs = 2
Q Ltd = Rs. 300 lakhs
Rs. 700 lakhs
= 2.33
Financial leverage = Profit before Tax
Earning before Interest & Tax
P Ltd = Rs. 100 lakhs
Rs. 150 lakhs
= 1.5
Q Ltd = Rs. 200 lakhs
Rs. 300 lakhs
= 1.5
Combined leverage = Earning before Tax
Contribution
(i.e., Operating leverage ◊ Financial leverage)
P Ltd = RsRs..^300100 lakhslakhs = 3
Q Ltd = RsRs..^700200 lakhslakhs = 3.5
Comment on the relative risk position of P Ltd. and Q Ltd.
(a) Operating Leverage: The operating leverage of Q Ltd. is higher than P Ltd.'
and hence Q Ltd. is exposed to higher business risk than P Ltd. A firm will face
business risk when the EBIT does not vary in direct proportion with the change in
sales.
(b) Financial Leverage: The financial leverage of both the companies is same
i.e., 1.5.
(c) Combined Leverage: When we study the overall risk of the companies, is
carrying higher risk than P Ltd.
- (i) Find the operating leverage from the following data:
Sales Rs. 50,000
Variable Costs 60%
Fixed costs Rs. 12,000