This document contains 22 questions from Amity Business School related to financial leverage, operating leverage, and combined leverage. Questions ask students to calculate various leverage ratios from income statements and balance sheets of companies. They are also asked to interpret the significance of leverage ratios and how they impact decision making. Students must calculate earnings per share, break-even point, changes in EPS from changes in sales or costs.
This presentation is prepared by Toran Lal Verma. The presentation deals with the calculation of cost of debt, equity, preference share and retained earnings.
| Capital Budgeting | CB | Payback Period | PBP | Accounting Rate of Return |...Ahmad Hassan
After studying this, you should be able to:
• Understand the payback period (PBP) method of project evaluation and selection, including its: (a) calculation; (b) acceptance criterion; (c) advantages and disadvantages; and (d) focus on liquidity rather than profitability.
• Understand the three major discounted cash flow (DCF) methods of project evaluation and selection – internal rate of return (IRR), net present value (NPV), and accounting rate of return (ARR).
• Explain the calculation, acceptance criterion, and advantages (over the PBP method) for each of the three major DCF methods. l Define, construct, and interpret a graph called an “NPV profile.”
• Understand why ranking project proposals on the basis of the IRR, NPV, and ARR methods “may” lead to conflicts in rankings.
• Describe the situations where ranking projects may be necessary and justify when to use either IRR, NPV, or ARR rankings.
• Understand how “sensitivity analysis” allows us to challenge the single-point input estimates used in traditional capital budgeting analysis.
• Explain the role and process of project monitoring, including “progress reviews” and “postcompletion audits.”
Explain the general concept of opportunity cost of capital.
Distinguish between the project cost of capital and the firm’s cost of capital.
Learn about the methods of calculating component cost of capital and the weighted average cost of capital.
Understand the concept and calculation of the marginal cost of capital.
Recognise the need for calculating cost of capital for divisions.
Understand the methodology of determining the divisional beta and divisional cost of capital.
Illustrate the cost of capital calculation for a real company.
time value of money
,
concept of time value of money
,
significance of time value of money
,
present value vs future value
,
solve for the present value
,
simple vs compound interest rate
,
nominal vs effective annual interest rates
,
future value of a lump sum
,
solve for the future value
,
present value of a lump sum
,
types of annuity
,
future value of an annuity
This presentation is prepared by Toran Lal Verma. The presentation deals with the calculation of cost of debt, equity, preference share and retained earnings.
| Capital Budgeting | CB | Payback Period | PBP | Accounting Rate of Return |...Ahmad Hassan
After studying this, you should be able to:
• Understand the payback period (PBP) method of project evaluation and selection, including its: (a) calculation; (b) acceptance criterion; (c) advantages and disadvantages; and (d) focus on liquidity rather than profitability.
• Understand the three major discounted cash flow (DCF) methods of project evaluation and selection – internal rate of return (IRR), net present value (NPV), and accounting rate of return (ARR).
• Explain the calculation, acceptance criterion, and advantages (over the PBP method) for each of the three major DCF methods. l Define, construct, and interpret a graph called an “NPV profile.”
• Understand why ranking project proposals on the basis of the IRR, NPV, and ARR methods “may” lead to conflicts in rankings.
• Describe the situations where ranking projects may be necessary and justify when to use either IRR, NPV, or ARR rankings.
• Understand how “sensitivity analysis” allows us to challenge the single-point input estimates used in traditional capital budgeting analysis.
• Explain the role and process of project monitoring, including “progress reviews” and “postcompletion audits.”
Explain the general concept of opportunity cost of capital.
Distinguish between the project cost of capital and the firm’s cost of capital.
Learn about the methods of calculating component cost of capital and the weighted average cost of capital.
Understand the concept and calculation of the marginal cost of capital.
Recognise the need for calculating cost of capital for divisions.
Understand the methodology of determining the divisional beta and divisional cost of capital.
Illustrate the cost of capital calculation for a real company.
time value of money
,
concept of time value of money
,
significance of time value of money
,
present value vs future value
,
solve for the present value
,
simple vs compound interest rate
,
nominal vs effective annual interest rates
,
future value of a lump sum
,
solve for the future value
,
present value of a lump sum
,
types of annuity
,
future value of an annuity
A manager should always reject a special order ifThe .docxstelzriedemarla
A manager should always reject a special order if:
The area to the right of the breakeven point and between the total revenue line and the total expense line represents:
The horizontal line intersecting the vertical y-axis at the level of total cost on a CVP graph represents:
The Muffin House produces and sells a variety of muffins. The selling price per dozen is $15, variable costs are $9 per dozen, and total fixed costs are $4,200. How many dozen muffins must The Muffin House sell to breakeven?
Corny and Sweet grows and sells sweet corn at its roadside produce stand. The selling price per dozen is $3.75, variable costs are $1.25 per dozen, and total fixed costs are $750.00. What are breakeven sales in dollars?
Pluto Incorporated provided the following information regarding its single product:
Direct materials used
$240,000
Direct labor incurred
$420,000
Variable manufacturing overhead
$160,000
Fixed manufacturing overhead
$100,000
Variable selling and administrative expenses
$60,000
Fixed selling and administrative expenses
$20,000
The regular selling price for the product is $80. The annual quantity of units produced and sold is 40,000 units (the costs above relate to the 40,000 units production level). The company has excess capacity and regular sales will not be affected by this special order. There was no beginning inventory. What would be the effect on operating income of accepting a special order for 3,500 units at a sale price of $55 per product?
Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production:
Sale price per unit
$400
Variable costs per unit:
$220
Manufacturing
$50
Marketing and administrative
Total fixed costs:
Manufacturing
$750,000
Marketing and administrative
$200,000
If a special sales order is accepted for 7,000 seats at a price of $350 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)
The effect of a plant closing on employee morale is an example of which of the following?
If total fixed costs are $455,000, the contribution margin per unit is $25.00, and targeted operating income is $25,000, how many units must be sold to breakeven?
In a special sales order decision, incremental fixed costs that will be incurred if the special order is accepted are considered to be:
In a special sales order decision, incremental fixed costs that will be incurred if the special order is accepted are considered to be:
Samson Incorporated provided the following information regarding its only product:
Sale price per unit
$50.00
Direct materials used
$160,000
Direct labor incurred
$185,000
Variable manufacturing overhead
$120,000
Variable selling and administrative expenses
$70,.
Chapter 18, Question 1- The following is the financial statement o.docxDinahShipman862
Chapter 18, Question 1- The following is the financial statement of Executive Fruit Company for the year ended December 2014.
INCOME STATEMENT, 2014
(Figures in $ Thousands)
Revenue
$
3,500
Cost of goods sold
3,150
EBIT
$
350
Interest
70
Earnings before taxes
$
280
State and federal tax
112
Net income
$
168
Dividends
112
Additions to retained earnings
$
56
BALANCE SHEET (Year-End, 2014)
(Figures in $ Thousands)
Assets
Net working capital
$
350
Fixed assets
1,400
Total assets
$
1,750
Liabilities and shareholders' equity
Long-term debt
$
700
Shareholders' equity
1,050
Total liabilities and shareholders' equity
$
1,750
The following are the first stage and second stage pro forma financial statements of Executive Fruit Company for the year ended December 2015.
First stage pro forma statements:
PRO FORMA INCOME STATEMENT, 2015
(Figures in $ Thousands)
Revenue
$
3,850
Cost of goods sold
3,465
EBIT
$
385
Interest
70
Earnings before taxes
$
315
State and federal tax
126
Net income
$
189
Dividends
126
Additions to retained earnings
$
63
PRO FORMA BALANCE SHEET (Year-End, 2015)
(Figures in $ Thousands)
Assets
Net working capital
$
385
Fixed assets
1,540
Total assets
$
1,925
Liabilities and shareholders' equity
Long-term debt
$
700
Shareholders' equity
1,113
Total liabilities and shareholders' equity
$
1,813
Required external financing
$
112
Second stage pro forma balance sheet:
PRO FORMA BALANCE SHEET (Year-End, 2015)
(Figures in $ Thousands)
Assets
Net working capital
$
385
Fixed assets
1,540
Total assets
$
1,925
Liabilities and shareholders' equity
Long-term debt
$
812
Shareholders' equity
1,113
Total liabilities and shareholders' equity
$
1,925
How would Executive Fruit’s financial model change if the dividend payout ratio were cut to 1/3? Use the revised model to generate a new financial plan for 2015 assuming that debt is the balancing item. What would be the required external financing?
(Do not round intermediate calculations.)
Dividends fall by $ [removed]. Therefore, the requirement for external financing falls from $ [removed]to $ [removed]. On the other hand, shareholders' equity will be increased by $ [removed].
The right-hand side of the balance sheet becomes
(Do not round intermediate calculations. Enter your answers in thousands.)
:
Long-term debt
$ [removed]
Shareholders' equity
[removed]
Total
$ [removed]
Chapter 18, Question 2- Find the sustainable and internal growth rates for a firm with the following ratios: asset turnover = 1.60; profit margin = 6%; payout ratio = 30%; equity/assets = .50.
(Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)
Sustainable growth rate
[.
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FIN 370 Week 1 Apply: Finance and Financial Statement Analysis Homework Review the Week 1 “Practice: Finance and Financial Statement Analysis Quiz” in Connect®. Complete the Week 1 “Apply: Finance and Financial Statement Analysis Homework” in Connect®. Note: You have only one attempt available to complete this assignment. Grades must be transferred manually to eCampus by
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1. Amity Business School
1.Calculate the degree of operating leverage, degree of financial leverage & degree of
ombined leverage from the following information.
Firm 1 Firm 2 Firm 3
nits 60000 15000 100000
elling Price $.60 $5 $.10
ariable cost $.20 $1.50 $.02
xed cost $7000 $14000 $1500
terest on borrowings $4000 $8000 -
2.The following information for the year ending 31st
March 2011 is available
terest on Debt $400000
eference Dividend $200000
orporate Taxes 40%
alculate the degree of financial Leverage if
EBIT is $1000000 and
EBIT is $1500000
2. Amity Business School
Q3.Consider the following figures:
Net Sales are Rs.16 Crores
EBIT as a percentage of sales is 10%
Corporate tax rate is 40%
Capital employed :
Equity shares @ of Rs.10 each is Rs 4 Crores
12% secured debenture @ of Rs 100 each Rs. 2 Crores
You are required to calculate EPS & percentage change in EPS if EBIT increases by
10%
Q4. Consider the following information of Pearson Ltd.
Selling price per unit Rs.200
Variable cost per unit Rs.120
Fixed Cost Rs.2000000
Interest on Debt Rs.1200000
Tax rate 40%
No of units produce 120000 Calculate the combine leverage &
percentage change in EPS if sales are increased by 5%
3. Amity Business School
Q5. ZOOP Ltd had the following Balance Sheet for the year ended 31st
March 2011
Liabilities Assets
Equity Capital (@Rs.10each) 1000000 Fixed Asset (net) 2500000
Reserve and Surplus 200000 Current Assets 1500000
15% debenture 2000000
Current Liabilities 800000
4000000 4000000
Additional information
Fixed cost (excluding interest payment) Rs.800000
Variable operating cost ratio 80%
Total Asset turnover ratio 3
Income tax 50%
You are required to calculate i. EPS ii. OL iii. FL iv. Combined leverage.
4. Amity Business School
Q6. The following are the operating result of a firm:
Sales (units) 25000
Interest p.a. Rs.30000
Selling price unit Rs.24
Tax Rate 50%
Variable cost Rs.16 per unit
No. of equity shares 10000
Fixed Cost p.a. Rs.80000
Compute the followings:
. Break even sales
i. EBIT
ii. EPS
v. Operating Leverage
v. Financial Leverage
vi. Combined Leverage.
5. Amity Business School
Q7. The following details of ABC ltd is available as on 31st
March 2011. you are
require to prepare the Income Statement of the company.
Operating leverage 3
Financial leverage 2
Interest charge p.a. Rs.20 Lakhs
Taxes 50%
Variable cost as a percentage of sales is 60%
Q8. You are a finance manager of Gel pen Ltd. The degree of operating leverage of
Your company is 5. The degree of financial leverage is 3. Director of your company
Has found that the degree of operating leverage & degree of financial leverage of your
Nearest competitor INK pen Ltd are 6 & 4 respectively. In his opinion the Ink pen ltd
Is better than that of Gel pen ltd. because of high value of degree of leverages.
Do you agree to your managing Director? Justify.
6. Amity Business School
.
Q9.X corporation has estimated that for a new product its Break even point is 2000 units
If the item is sold for Rs.14 per unit; the variable cost is Rs. 9 per unit. Calculate the
Degree of operating leverage for sales volume of 2500 units and 3000 units.
Q10. The capital structure of a company consists of ordinary share capital of
Rs10,00,000 (shares of Rs 100 each) and Rs 10,00,000 of 10% debenture.
The selling price is Rs 10 per unit; Variable costs amount to Rs 6 per unit and fixed
Expenses amounted to Rs 2,00,000. The income tax is assumed to be 50%. The sales
Level are expected to increase from 1,00,000 units to 1,20,000 units.
You are required to calculate the degree of operating, financial leverage
Q11. A firm’s sales, variable costs and fixed cost amount to Rs 75,00,000, Rs 42,00,000
And Rs 6,00,000 respectively. It has borrowed Rs. 45,00000 at 9% and its equity capital
Totals Rs 55,00,000.
What is firms ROI?
Does it have favorable financial leverage
Calculate operating, financial & combined leverage.
If the sales drop to Rs. 50,00,000, what will be the new EBIT?
7. Amity Business School
Q12. Following is the Balance sheet of Z ltd
Liabilities Amount Assets Amount
Equity Share Capital 60000 Fixed Asset 150,000
Retaining Earnings 20000 Current Assets 50000
10% long term debts 80000
Current Liabilities 40000
The company’s total Asset turnover ratio is 4, its fixed operating costs are Rs 1,00,000
And its variable operating cost is 40%. The income tax is 50%. Calculate the financial
Leverage when face value of the share is Rs 10. also calculate the operating leverage.
8. Amity Business School
Q13. Installed Capacity is 20,000 units, Actual Production and sales is 75% of installed
Capacity, selling price per unit Rs 10, Fixed cost Rs 30,000, Total operating cost 80%.
Calculate operating leverage
Q14. From the following information calculate the percentage of change in EPS if
Sales are increased by 5%
EBIT Rs.1120
EBT Rs.320
Fixed Cost Rs.700
Q15. Calculate operating leverage, Financial Leverage & combine leverage under
Situation 1 & 2 and financial plan A & B
Installed capacity 2000 units
Annual production and sales 50% of installed capacity
Selling price per unit is Rs20: Variable cost per unit Rs.10
Fixed Cost: Situation 1 is 4000 & for Situation 2 is 5000
Capital Structure for Plan A is Equity Rs 5000 & Debt (cost 10%) is Rs.15000
for Plan B is Equity Rs.15000 & Debt (cost 10%) is Rs.5000
9. Amity Business School
Q19. A firm has sales of Rs.10,00,000, Variable Cost of Rs. 7,00,000 and fixed costs of
Rs. 2,00,000 and debt of Rs. 5,00,000 @ 10% rate of Interest. What are the operating
Financial, and combined leverage? If the firm wants to double its earnings before
Interest and tax, how much of a rise in sales would be needed on a percentage basis?
Q20. Explain the significance of operating, financial & combined leverage in
Managerial decision making with example.
Q21.Income statement of Zenith ltd is given below. Calculate & interpret its degree of
Operating leverages, degree of financial leverage and degree of combined leverage.
Sale Rs.1050000
Variable Cost Rs. 767000
Fixed Cost Rs. 75000
EBIT Rs.208000
Interest Rs.110000
Taxes@ 30% Rs.29400
Net Income Rs.68600
10. Amity Business School
Q22. If the combined leverage & operating leverage figures of a company are
2.5 & 1.25 respectively find the financial leverage & P/V ratio, given that equity
Dividend per share is Rs.2, interest payable per year is Rs.1 lakhs, total fixed cost is
50,000 and sales Rs.10 lakhs