Answer to Question #121474 in Finance for Sheshadri

Question

2. The Capital structure of ABC Ltd, is as under:
Equity share capital - ₹ 100 Lacs
10% Debentures - ₹ 50 Lacs

• The sales for the year 2019 are 1.5 Lac units@ ₹ 40per unit
• Also, the variable cost per unit is 20 % of sales revenue
• ₹ 12 Lacs is the fixed operating cost.
• Assume Income tax rate as 40 %

Calculate Operating, Financial and Combined Leverage of the firm and interpret the result.

Answer 1

Operating Leverage

$OL=\frac{S-VC}{FC}=\frac{60-12}{12}=4$

Financial Leverage

$FL=\frac{ Debentures }{Equity share capital }=\frac{50}{100}=0.5$

Combined Leverage

$CL=\frac{60-12}{60-12-12}=1.3$

greatest effect print Operating Leverage