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Financial Leverage & Solutions to questions on Operating Leverage (in Hindi)
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Heena Malhotra
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These are extremely helpful!
degree of operating leverage kaise calculate kiya... smjh m nhi aya plz xplain agin
mam voice nd picture k bich me gape problem kyu aati h aap ki hr video me?
help full mam thankx
  1. Financial Decisions- Leverage By Heena Malhotra


  2. Analysis of Leverage Types of Leverage (i) Operating Leverage (ii) Financial Leverages (iii) Combined Leverages Business and Financial Risk By Heena Malhotra


  3. Question A Company produces and sells 10,000 shirts. The selling price per shirt is 500. Variable ost is 200 per shirt and fired operating cost is t 25,00,000 () Calculate operating leverage. (b) If sales are up by 10%, then what is the impact on EBIT? By Heena Malhotra


  4. SOLUTION (a) Statement of Profitability Particulars Sales Revenue (10,000 x 500) Less: Variable Cost (10,000 200) Contribution Less: Fixed Cost 50,00,000 20,00,000 30,00,000 25,00,000 5,00,000 EBIT Contribution 30 lakhs 5 lakhs Operating Leverage- By Heena Malhotra


  5. % Change in EBIT % Change in Sales (b) Operating Leverage (OL) = X/5,00,000 5,00,000/50,00,000 73,00,000 .A EBIT 3,00,000/5,00,000 :8% = By Heena Malhotra


  6. Calculate the operating leverage for each of the four firms A, B, C and D from the following price and cost data: Firms A R) Sale price per unit Variable cost per unit Fixed operating cost What calculations can you draw with respect to levels of fixed cost and the degree of 32 16 40,000 50 20 1,00,000 70 50 Nil 20 60,000 operating leverage result? Explain. Assume number of units sold is 5,000 By Heena Malhotra


  7. SOLUTION Particulsrs Firms Sales (units) Sales revenue (Units x price) (?) Less: Variable cost | 1,00,000 | (30,000) (80,000) (1,00,000) (2,50,000) 1,60,000 | 2,50,000| 3,50,000 (Units x variable cost per unit) (e) Less: Fixed operating costs (R) EBIT Nil 50,000 1,00,000 (60,000) (40,000) (1,00,000) 10,000 40,000 Current sales (S) Variable costs (VC) Current EBIT DOL = By Heena Malhotra


  8. 1,00,000 30,000 10,000 DOLA DOL(B) = DOL = , 60, 000-780, 000 740,000 2,50,000 1,00,000 DOL50,000 DOL(D) = 1,00,000 3,50,000-72,50,000- The operating leverage exists only when there are fixed costs. In the case of firm D, there is no magnified effect on the EBIT due to change in sales. A 20 per cent increase in sales has resulted in a 20 per cent increase in EBIT. In the case of other firms, operating leverage exists. It is maximum in firm A, followed by firm C and minimum in firm B. The interception of DOL of 7 is that1 per cent change in sales results in 7 per cent change in EBIT level in the direction of the change of sales level of firm A. By Heena Malhotra


  9. Financial Leverage Financial leverage (FL) maybe defined as the use of funds with a fixed cost in order to increase earnings per share. In other words, it is the use of company funds on whicih it pays a limited return. Financial leverage involves the use of funds obtained at a fixed cost in the hope of increasing the return to common stockholders. Earnings before interest and tax(EBIT) Earnings before tax (EBT) Financial Leverage (FL) By Heena Malhotra


  10. Degree of financial leverage is the ratio of the percentage increase in earnings per share (EPS) to the percentage increase in earnings before interest and taxes (EBIT) Financial Leverage (FL) is also defined as "the ability of a firm to use fixed financial charges to magnify the effect of changes in EBIT on EPS Degree of Financial Leverage (DFL) Percentage change in earnings per share (EPS) Percentage change in earnings before interest and tax (EBIT) A EPS EPS or A EBIT EBIT By Heena Malhotra


  11. Financial Leverage Positive Infinite/ Undefined Negative EBIT level is more EBIT level is less Operating at than Fixed Financial Financial break eventhan Fixed Financial point Charge Charge EPS: will change in L the same direction -No Profit no Loss EPS : Negative as EBIT By Heena Malhotra


  12. Situation 3 : when EBT is nil (EBIT = Fixed Interest) EBIT Degree of Finance Leverageundefined. Nil By Heena Malhotra


  13. Situation 1: No Fixed Interest Charges Particulars EBIT Tax @ 50% PAT No. of share EPS 1,00,000 50,000 50,000 10,000 1,50,000 75,000 75,000 10,000 7.5 Change in EPS Change in EBIT 50% 50% Degree of Finance Leverage (DFL) = By Heena Malhotra


  14. Combined Leverage o Combined leverage maybe defined as the potential use of fixed costs, both operating and financial, which magnifies the effect of sales volume change on the earnina ner share of the firm Degree of combined leverage (DCL) is the ratio of percentage change in earning per share to the percentage change in sales. It indicates the effect the sales changes wil have on EPS DCL = DOL DFL %change in EBIT %Change in sales %Change in EPS %Change n Sales %Change in EPS %Change in EBIT - By Heena Malhotra


  15. A firm's details are as under: Sales (@100 per unit) Variable Cost Fixed Cost 24,00,000 50% 10,00,000 10,00,00OR 100 each) It has borrowed 10,00,000 @ 10% pa and its equity share capital is Calculate (a) Operating Leverage (b) Financial Leverage (c) Combined Leverage By Heena Malhotra


  16. 12,00,000 6 times (a) Operating Leverage (b) FinancialLeverage= -2times (c) Combined Leverage : OLX FL-6 x 2 = 12 times. 200,000 2,00,000 = 2 times 1,00,000 By Heena Malhotra


  17. 1. Given Operating fixed costs Sales 20,000 1,00,000 40% P/V ratio The operating leverage is: (a) 2.00 (b) 2.50 (c) 2.67 (d) 2.47 If EBIT is? 15,00,000, interest is leverage is 2,50,000, corporate tax is 40%, degree of financial (b) 1.20 (c) 1.31 (d) 1.41 By Heena Malhotra


  18. O 3. If DOL is 1.24 and DFL is 1.99, DCL would be: o (a) 2.14 o (b) 2.18 o (c) 2.31 o (d) 2.47 By Heena Malhotra