The capital structure of ABC Pvt. Ltd is as follows:
Equity share capital (eachshareofRs.10) = Rs.16, 00,000
Debentures with a coupon rate of 10% = Rs. 10, 00,000
Reserves and surplus = Rs.15, 00,000
Revenue from the business activities for the company is Rs. 2.00 crores. Its variable cost is 10% of the revenue, fixed operating cost is Rs. 60 lakhs and the company pays income tax at a rate of 25%. (10Marks)
a. Calculate financial leverage, operating leverage and combined leverage for the company.
b. Determine the likely level of EBIT for EPS of (i) Rs.45, (ii) Rs.60, and(iii) Rs. 75.
Solution:
a.). Financial Leverage =
Total Debt = 1000,000
Shareholders Equity = Equity shares + Reserves and Surplus = 1,600,000 + 1,500,000 = 3,100,000
Financial Leverage =
Financial Leverage = 0.32
Operating Leverage =
Fixed Costs = 60 lakhs = 0.60 crores
Variable Costs = crores = 0.20 crores
Total Costs = FC + VC = 0.60 + 0.20 = 0.80 crores
Operating Leverage =
Operating Leverage = 0.75
Combined Leverage = Operating Leverage x Financial Leverage = 0.75 0.32 = 0.24
Combined Leverage = 0.24
b.). EBIT for EPS of:
i.). Rs.45
EPS =
No. of shares outstanding = = 160,000 shares
45 =
Net income = 45 x 160,000 = 7,200,000
Less Income Tax (25 7,200,000) = (1,800,000)
Less Interest (101,000,000) = (100,000)
EBIT = 5,300,000
ii.). Rs.60
60 =
Net income = 60 160,000 = 9,600,000
Less Income Tax (7,200,000) = (2,400,000)
Less Interest ( 1,000,000) = (100,000)
EBIT = 7,100,000
ii.). Rs.75
75 =
Net income = 75 160,000 = 12,000,000
Less Income Tax ( 25% x 7,200,000) = (3,000,000)
Less Interest (10 1,000,000) = (100,000)
EBIT = 8,900,000
Comments