ABC Manufacturing Limited produces industrial components with a well-established market presence. The company operates under a special tax-free…
CA Intermediate · Financial Management and Strategic Management · RTP · May 2026
ABC Manufacturing Limited produces industrial components with a well-established market presence. The company operates under a special tax-free status granted by the government, which exempts it from corporate income tax obligations. Financial Information The company's financial parameters for the current fiscal year are as follows: Capital Structure Details Total Capital Invested:20,00,000 (20 lakhs)Cost of Equity (K e ): 12% per annumCost of Debt (K d ): 6% per annumWeighted Average Cost of Capital (WACC): 9% per annum Operational Information Annual Sales Revenue:24,00,000 (24 lakhs)Variable Costs: 50% of sales revenueFixed Costs:10,00,000 (10 lakhs) per annum General corporate tax is 25% As a financial analyst, you have been tasked with conducting a comprehensive financial analysis of ABC Manufacturing Limited. Specifically, you are required to: v. FIND the different leverages in the following format Leverages Computation Dependent on Indicates effect of ___ on ___ Leverages showing level of business risk Leverages showing level of finance risk Leverages showing level of combined risk
Suggested Answer and Working Notes:
Leverages showing level of different risk Leverages showing level of Leverages Computation Dependent on Indicates effect of ___ on ___ Business risk Operating Leverage (DOL) Contribution ÷ EBIT = 12,00,000 ÷ 2,00,000 = 6 Fixed Operating Costs Sales on EBIT Financial Risk Financial Leverage (DFL) EBIT ÷ EBT = 2,00,000 ÷ 1,40,000 = 1.43 Fixed Financial Costs EBIT on EPS Combined Risk Combined Leverage (DCL) Contribution ÷ EBT or DOL × DFL = 6 × 1.43 = 8.58 Both Fixed Operating & Fixed Financial Costs Sales on EPS
Topics: Part-A: Financial Management
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