RK Limited provided following data for the year ended on 31-03-2025: Sales 50,00,000 EPS 2.50 Tax Rate 40% Fixed cost excluding interest 10,80,000…

(i) Calculation of Earnings before Interest and Tax (EBIT) Particulars Amount (₹) Sales Revenue 50,00,000 Less: Variable Cost (Balancing figure) 21,20,000 Contribution 28,80,000 Less: Fixed Cost (excluding interest) 10,80,000 Earnings Before Interest & Tax (EBIT) 18,00,000 Less: Interest on Debentures (12% of 75,00,000) 9,00,000 Earnings Before Tax (EBT) 9,00,000 Less: Tax @ 40% 3,60,000 Profit After Tax (PAT) 5,40,000 Less: Preference Dividend (10% of 9,00,000) 90,000 Profit available to Equity Shareholders 4,50,000 (1,80,000 × 2.50) (ii) Combined Leverage = Contribution / (EBT - Pref. Dividend (Pre - tax)) = 28,80,000 / (9,00,000 - 1,50,000) = 3.84 (iii) EBT zero means 100% reduction in EBT. Since combined leverage is 3.84, sales have to be dropped by 100/3.84 = 26.042%. Hence new sales will be - 50,00,000 × (100 – 26.042)% = 36,97,900. Therefore, at 36,97,900 level of sales, the Earnings before Tax of the company will be equal to zero. Combined Leverage and Sales can also be calculated without deducting preference dividend in following way: (ii) Combined Leverage = Contribution / EBT = 28,80,000 / 9,00,000 = 3.2 (iii) EBT zero means 100% reduction in EBT. Since combined leverage is 3.2, sales have to be dropped by 100/3.2 = 31.25%. Hence new sales will be - 50,00,000 × (100 – 31.25)% = 34,37,500. Therefore, at 34,37,500 level of sales, the Earnings before Tax of the company will be equal to zero.