Following Balance Sheet and Income Statement have been obtained from the books of accounts of Pinaca Pvt. Ltd. Balance Sheet as on March 31 st 2025…

CA Intermediate · Financial Management and Strategic Management · RTP · January 2026
Following Balance Sheet and Income Statement have been obtained from the books of accounts of Pinaca Pvt. Ltd. Balance Sheet as on March 31 st 2025 Liabilities Amount (₹) Assets Amount (₹) Equity Capital (10 per share) 80,00,000 Net Fixed Assets 1,00,00,000 10% Debt 60,00,000 Current Assets 90,00,000 Retained Earnings 35,00,000 Current Liabilities 15,00,000 1,90,00,000 1,90,00,000 Income Statement for the year ending March 31 st 2025 Particulars Amount (₹) Sales 34,00,000 Less: Operating expenses (including - 6,00,000 depreciation) (12,00,000) EBIT 22,00,000 Less: Interest (6,00,000) Earnings before tax 16,00,000 The tax rate applicable to the company is 35 percent. (i) DETERMINE the degree of operating, financial and combined leverages at the current sales level, if all operating expenses, other than depreciation, are variable costs. (ii) If total assets remain at the same level, but sales (i) increase by 20 percent and (ii) decrease by 20 percent, COMPUTE the earnings per share at the new sales level?

Suggested Answer and Working Notes:

(i) Degree of operating, financial and combined leverages at the current sales level: Variable Costs = 6,00,000 (total cost - depreciation) Contribution = Sales - Variable Costs = 34,00,000 - 6,00,000 = 28,00,000 EBIT = 22,00,000 Interest = 6,00,000 EBT = 16,00,000 DOL = Contribution / EBIT = 28,00,000 / 22,00,000 = 1.27 DFL = EBIT / EBT = 22,00,000 / 16,00,000 = 1.375 DCL = DOL × DFL = 1.27 × 1.375 = 1.75 (ii) Earnings per share at the new sales level Number of equity shares = 80,00,000 / 10 = 8,00,000 shares Variable Costs at: (i) Sales level,40,80,000 (increase by 20%) = 6,00,000 / 34,00,000 * 40,80,000 = 7,20,000 (ii) Sales level,27,20,000 (decrease by 20%) = 6,00,000 / 34,00,000 * 27,20,000 = 4,80,000 Particulars Increase by 20% (Amount in ₹) Decrease by 20% (Amount in ₹) Sales level 40,80,000 27,20,000 Less: Variable expenses 7,20,000 4,80,000 Less: Fixed cost (including depreciation) 6,00,000 6,00,000 Earnings before interest and taxes 27,60,000 16,40,000 Less: Interest 6,00,000 6,00,000 Earnings before taxes 21,60,000 10,40,000 Less: Taxes @35% 7,56,000 3,64,000 Earnings after taxes (EAT) 14,04,000 6,76,000 Number of equity shares 8,00,000 8,00,000 EPS 1.76 0.85

Topics: Part-A: Financial Management

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