The following particulars are related to PQR Ltd: Sales - 1,50,00,000Variable Cost - 84,00,000Fixed Cost - 12,00,000 The company has borrowed -…

CA Intermediate · Financial Management and Strategic Management · MTP · May 2026
The following particulars are related to PQR Ltd: Sales - 1,50,00,000Variable Cost - 84,00,000Fixed Cost - 12,00,000 The company has borrowed - 90,00,000 at 10% and its equity capital is 1,10,00,000. You are required to CALCULATE: (i) Return on Investment (ROI). (ii) Operating and Financial Leverages. (iii) Combined Leverage. (iv) Earnings Before Interest and Taxes (EBIT), if the sale is dropped to 1,00,00,000.

Suggested Answer and Working Notes:

(i) ROI EBIT = Sales - VC – FC= 1,50,00,000 – 84,00,000 – 12,00,000 = 54,00,000Investment = Debt + Equity = 90,00,000 +1,10,00,000 = 2,00,00,000ROI = EBIT / Investment = 54,00,000 /2,00,00,000 = 27% (ii) Operating and Financial Leverages Contribution = Sales - Variable Cost = 1,50,00,000 -84,00,000 = 66,00,000Operating Leverage = Contribution / EBIT = 66,00,000 /54,00,000 = 1.222 timesInterest on Debt = 10% of 90,00,000 = 9,00,000EBT = EBIT - Interest = 54,00,000 -9,00,000 = 45,00,000Financial Leverage = EBIT / EBT = 54,00,000 /45,00,000 = 1.2 times (iii) Combined Leverage Combined Leverage = OL × FL = 1.222 x 1.2 = 1.466 times. (iv) Earnings Before Interest and Taxes (EBIT), if the sale is dropped to 1,00,00,000. Operating Leverage = % Change in EBIT / % Change in Sales1.222 = % Change in EBIT / ((₹ 1,00,00,000 -1,50,00,000) /1,50,00,000)1.222 = % Change in EBIT / (-0.3333)% Change in EBIT = 1.222 × (-0.3333) = -0.4073 = -40.73%New EBIT = 54,00,000 × (1 - 0.4073) = 54,00,000 × 0.5927 = 32,00,580 ≈ ₹ 32,00,000

Topics: Part-A: Financial Management

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