Alpha Limited has provided following information: Equity Share Capital 25,000 Shares @100 per Share 15% Debentures 10,000 Debentures@750/- per…

CA Intermediate · Financial Management and Strategic Management · PYQS · May 2024
Alpha Limited has provided following information: Equity Share Capital 25,000 Shares @100 per Share 15% Debentures 10,000 Debentures@750/- per Debenture Sales 50 Lakhs units@20 per unit Variable Cost 12.50 per unit Fixed Costs 175.00 Lakhs Due to recent policy changes and entry of foreign competitors in the sector, Alpha Limited expects the sales may decline by 15-20%, However, selling price and other costs will remain the same. Corporate Taxes will continue@20%. You are required to calculate the decrease in Earnings per share, Degree of Operating Leverage and Financial Leverage separately if sales are declined by (i) 15%; and (ii) 20%;

Suggested Answer and Working Notes:

Income Statement with required calculations Particulars Particulars Particulars ₹ Existing Sales declined by 15% Sales declined by 20% Sales in units 50,00,000 42,50,000 40,00,000 Sales price per unit 20 20 20 Variable Cost per unit (12.50) (12.50) (12.50) Contribution per unit 7.5 7.5 7.5 Contribution 3,75,00,000 3,18,75,000 3,00,00,000 Fixed expenses (1,75,00,000) (1,75,00,000) (1,75,00,000) EBIT 2,00,00,000 1,43,75,000 1,25,00,000 Debenture Interest (11,25,000) (11,25,000) (11,25,000) EBT 1,88,75,000 1,32,50,000 1,13,75,000 Tax @ 20% (37,75,000) (26,50,000) (22,75,000) Profit after tax (PAT) 1,51,00,000 1,06,00,000 91,00,000 No. of shares 25,000 25,000 25,000 Earnings per share (EPS) = PAT No. of shares 1,51,00,000 25,000 = 604 1,06,00,000 25,000 = 424 91,00,000 25,000 = 364 (i) Decrease in EPS = 180 = 240 Or Or % Decrease in EPS = 180 604 x 100 = 29.80% % Decrease in EPS = 240 604 x 100 = 39.73% (ii) Operating leverage = Contribution EBIT 3,18,75,000 1,43,75,000 = 2.22 3,00,00,000 1,25,00,000 = 2.40 Or Or 28.125/15 = 37.50/20 = 1.875 Degree of Operating leverage = Percentage change in EBIT Percentage change in sales 1.875 (iii) Financial Leverage = EBIT EBT 1,43,75,000 1,32,50,000 = 1.08 1,25,00,000 1,13,75,000 = 1.10 Or Or Degree of Financial Leverage = Percentage change in EPS Percentage change in EBIT 29.80/28.125 = 1.06 39.735/37.50 = 1.06

Topics: Part-A: Financial Management

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