From the following PREPARE Income statement of company P and Q. P Q No. of Equity Shares 1,00,000 70,000 Financial leverage 3:1 4:1 Operating…

CA Intermediate · Financial Management and Strategic Management · MTP · May 2024
From the following PREPARE Income statement of company P and Q. P Q No. of Equity Shares 1,00,000 70,000 Financial leverage 3:1 4:1 Operating Leverage 2:1 3:1 Variable cost to sales 67% 50% Interest 5,50,000 6,00,000 Income tax rate 30% 30% Also CALCULATE EPS of the company.

Suggested Answer and Working Notes:

Income statement Particulars P (₹) Q (₹) Sales 50,00,000 48,00,000 (-) Variable Cost 33,50,000 24,00,000 Contribution 16,50,000 24,00,000 Fixed Cost 8,25,000 16,00,000 EBIT 8,25,000 8,00,000 (-) Interest 5,50,000 6,00,000 EBT 2,75,000 2,00,000 (-) Tax 82,500 60,000 EAT 1,92,500 1,40,000 (÷) No. of Shares 1,00,000 70,000 EPS 1.93 2.00 Working Note : 1. Financial Leverage Financial Leverage = EBIT / (EBIT - Int.) Let the EBIT be X P Q 3 = X / (X – 5,50,000) 4 = X / (X – 6,00,000) 3(X – 5,50,000) = X 4(X – 6,00,000) = X 3 X – 16,50,000 = X 4 X – 24,00,000 = X 2 X = 16,50,000 3 X = 24,00,000 X = 8,25,000 X = 8,00,000 2. Operating Leverage = Contribution / EBIT Let the Contribution be X P Q 2 = X / 8,25,000 3 = X / 8,00,000 X = 16,50,000 X = 24,00,000 3. Sales Let the Sales be 100 Sales - Variable Cost = Contribution P Q Contribution = 100 – 67 = 33 = 100 – 50 = 50 Sales For 33 = 16,50,000 For 50 = 24,00,000 For 100 = 50,00,000 For 100 = 48,00,000

Topics: Part-A: Financial Management

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