Anirban Ltd. is a well-established manufacturing company engaged in producing industrial components for various engineering industries. The…

CA Intermediate · Financial Management and Strategic Management · RTP · September 2026
Anirban Ltd. is a well-established manufacturing company engaged in producing industrial components for various engineering industries. The management intends to assess the company's financial performance and capital structure efficiency using key financial ratios and leverage measures. The following information has been extracted from the company's latest financial statements. Capital Structure of Anirban Ltd. Source of Finance Amount (₹) Equity Share Capital (₹10 per share) 8,00,000 10% Preference Share Capital (₹100 per share) 5,00,000 12% Debentures (₹100 each) 7,00,000 Total Capital Employed 20,00,000 Additional Information: 1. The company reported a Profit After Tax (PAT) of ₹2,80,000 during the year. 2. The applicable corporate tax rate is 30%. 3. Total operating expenses, including depreciation of ₹96,800, are equal to 1.5 times the Earnings Before Interest and Tax (EBIT). 4. Equity shareholders were paid a dividend at the rate of 15%. 5. The market price per equity share is ₹23. Required: Based on the information provided above, calculate the following: (i) Operating Leverage and Financial Leverage. (ii) Preference Dividend Cover and Equity Dividend Cover. (iii) Earnings Yield Ratio. (iv) Price-Earnings (P/E) Ratio. Show all necessary workings and assumptions clearly.

Suggested Answer and Working Notes:

Working Notes: (₹) Net Profit after Tax 2,80,000 Tax @ 30% 1,20,000 EBT 4,00,000 Interest on Debentures 84,000 EBIT 4,84,000 Total Operating Expenses (1.5 times of EBIT) 7,26,000 Sales 12,10,000 (i) Operating Leverage Variable operating expenses = ₹7,26,000 - ₹96,800 = ₹6,29,200 Contribution = Sales - Variable Operating Expenses = ₹12,10,000 - ₹6,29,200 = ₹5,80,800 Operating Leverage = Contribution / EBIT = ₹5,80,800 / ₹4,84,000 = 1.2 times Financial Leverage = EBIT / EBT = ₹4,84,000 / ₹4,00,000 = 1.21 times (ii) Cover for Preference Dividend Preference Share Dividend = 10% of ₹5,00,000 = ₹50,000 Cover for Preference Dividend = PAT / Preference Share Dividend = ₹2,80,000 / ₹50,000 = 5.6 times Cover for Equity Dividend Equity Share Capital = ₹8,00,000 (80,000 shares of ₹10 each) Equity Dividend = 15% of ₹8,00,000 = ₹1,20,000 Cover for Equity Dividend = (PAT - Preference Dividend) / Equity Dividend = (₹2,80,000 - ₹50,000) / ₹1,20,000 = ₹2,30,000 / ₹1,20,000 = 1.92 times (iii) Earnings Yield Ratio EPS = (PAT - Preference Dividend) / Number of Equity Shares = (₹2,80,000 - ₹50,000) / 80,000 = ₹2,30,000 / 80,000 = ₹2.875 Earnings Yield Ratio = (EPS / Market Price) × 100 = (₹2.875 / ₹23) × 100 = 12.5% (iv) Price-Earnings (P/E) Ratio P/E Ratio = Market Price / EPS = ₹23 / ₹2.875 = 8 times Note: All operating expenses, other than depreciation, are variable costs.

Topics: Part-A: Financial Management

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