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Unit 5 BBM 402 Tutorials

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Unit 5 BBM 402 Tutorials

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artistic.nature.11
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Unit 5 – Tutorial Exercises

Q1. From the following information for 4 companies, calculate a. EBIT b. EPS c. OPERATING LEVERAGE

d. FINANICIAL LEVERAGE

PARTICULARS P Q R S
SELLING PRICE RS. 15 20 25 30
/UNIT
VARIABLE COST/ RS. 10 15 20 25
UNIT
QUANTITY no.s 20,000 25,000 30,000 40,000
FIXED COST RS. 30,000 40,000 50,000 60,000
INTEREST RS. 15,000 25,000 35,000 40,000
TAX RATE % 40 40 40 40
NO. OF EQUITY 5,000 9,000 10,000 12,000
SHARES

Q2. A simplified income statement of Zenith ltd., Is given below. Calculate and interpret its degree of
operating leverage, degree of financial leverage and degree of combined leverage.

INCOME STATEMENT of Zenith Ltd. FOR THE YEAR 31ST MAERCH 2017

SALES 10,50,000
VARIABLE COST 7,67,000
FIXED COST 75,000

EBIT 2,08,000
INTEREST 1,10,000
TAXES (30%) 29,400

NET INCOME 68,600

Q3. The following are the operating results of a firm: compute

a. BREAK EVEN SALES b. EARNINGS BEFORE INTEREST AND TAXES c. EARNINGS PER SHARE

d. OPERATING LEVERAGE e. FINANCIAL LEVERAGE

Sales (Unit) 25,000


Interest p.a. Rs. 30,000
Selling price per unit Rs. 24
Tax Rate 50%
Variable cost per unit Rs. 16
Fixed cost p.a. Rs. 80,000
Q4. ONE-UP LTD. has equity share capital of Rs. 500000 divided into shares of Rs. 100 each. It wishes to
raise further Rs. 3,00,000 for expansion-cum-modernization scheme. The co. Plans the following
financing alternatives:

• By issuing equity shares only.


• Rs. 10,0000 by issuing equity shares and Rs. 2,00,000 through debentures or term loan @10 % p.
a.
• By raising term loan only at 10 % p. a.
• Rs. 1,00,000 by issuing equity shares and Rs. 2,00,000 by issuing 8 % preference shares
• You are required to suggest the best alternatives giving your comment assuming that the
estimated earnings before interest and taxes after expansion are Rs. 1,50,000 and corporate
rate of tax is 35%.

Q5. ABC ltd. has the following capital structure Rs. lacs

Ordinary shares: 10 lac no’s@ Rs. 10 each 100


Reserves and surplus 40
10% debentures each of face value Rs. 100 60
200

The company needs 50 lacs to execute a new project which will raise its operating profit (EBIT) from the
current level of Rs. 40 lacs to Rs. 55 lacs. It is considering the following options:

• Issue equity shares @ a premium of Rs. 15 each for the entire amount.
• Issue 12% debentures for Rs. 50 lacs required additionally.
• Issue equity shares for Rs. 25 lacs at a premium of Rs. 20 per share, and issue 12 % debentures
for the balance amount.

The co. tax rate is 40 %. Evaluate the three options and advice the company.

Q6. A company needs Rs. 5 cr. For construction of a new plant. The following three financial plans are
feasible:

1. The co. may issue 50,00,000 shares @ Rs 10 / share.


2. The co. may issue 25,00,000 shares @ Rs. 10 / share and 2,50,000 debentures of Rs. 100
denominations bearing a 8% rate of interest.
3. The co. may issue 25,00,000 shares @ Rs 10 / share and 2,50,000 preference shares @ Rs. 100/
share bearing an 8 % rate of dividend.

If the co.’s EBIT are Rs. 10,00,000, Rs. 20,00,000, Rs. 40,00,000, Rs. 60,00,000 and Rs. 1,00,00,000, what
are the earnings per share under each of the three financial plans? Assume a corporate tax rate of 35 %

Which alternatives would you recommend and why?

Determine the indifference points between: a. financial plans 1 and 2 b. financial plans1 and 3

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