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92 Financial Management Capital structure: Financial Plan X (Rs.) Y (Rs.) Equity 25,000 50,000 Debt (cost 10%) 50,000 25,000 75,000 75,000 Solution Annual production and sales 60% of 5,000 = 3000 Unit Contribution per Unit Rs. Selling Price 25 Per Unit Variable Price 15 Per Unit 10 Per Unit Total contribution is 3000 Units×Rs. 10=Rs. 30,000 Computation of leverage. Financial plan PLAN-X PLAN-Y Situation 1 Situation 2 Situation 1 Situation 2 Contribution 30000 30000 30000 30000 Fixed cost operating profit (or) EBIT 10000 12000 10000 12000 20000 18000 20000 18000 Interest on Debts 10% of 50,000 5000 5000 2500 2500 10% of 25,000 Earnings before Tax 15000 13000 17500 15500 (i) Operating Leverage Contribution 30000 30000 30000 30000 20000 18000 20000 18000 = 1.5 1.67 1.5 1.67 (ii) Financial Leverage Operating Profit (op) 20000 18000 20000 18000 Profit Before Tax (PBI) 15000 13000 17500 15500 (iii) Combined leverage OL × FL = 1.5 × 1.33 1.67 × 1.38 1.5 × 1.14 1.67 × 1.16 1.995 2.30 1.71 1.94 Highest and least value of combined leverage. Highest Value = 2.30 under situation 2 plan X. Least Value = 1.71 under situation 1 plan Y.
Leverage 93 Exercise 6 Calculate operating, financial and combined leverages under situations when fixed costs are: (i) Rs. 5,000 and (ii) Rs. 10,000 and financial plans 1 and 2 respectively from the following information pertaining to the operating and capital structure of a textile company : Rs. Total Assets 30,000 Total Assets turnover 2 Variable cost as percentage of sales 60 Capital structure Financial Plan 1 2 Rs. Rs. Equity 30,000 10,000 10% debentures 10,000 30,000 Solution Computation of Leverage Financial Plan Plan 1 2 Situation i ii i ii Sales 60,000 60,000 60,000 60,000 Less : Variable cost 36,000 36,000 36,000 36,000 Contribution 24,000 24,000 24,000 24,000 Less : Fixed cost 5,000 10,000 5,000 10,000 Operating profit (EBIT) 19,000 14,000 19,000 14,000 Less : Interest 1,000 1,000 3,000 3,000 Profit before tax (PBT) 18,000 13,000 16,000 11,000 Operating leverage 24,000 24,000 24,000 24,000 Contribution 19,000 14,000 19,000 14,000 EBIT 1.26 1.71 1.26 1.71 Financial leverage 19,000 14,000 19,000 14,000 EBIT 18,000 13,000 16,000 11,000 PBT 1.05 1.07 1.18 1.27 Combined leverage 1.32 1.83 1.49 2.17 WORKING CAPITAL LEVERAGE One of the new models of leverage is working capital leverage which is used to locate the investment in working capital or current assets in the company. Working capital leverage measures the sensitivity of return in investment of charges in the level of current assets.
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Preface Financial Management is an
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Contents • Increase the value of
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Contents • Effects of under capit
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Contents Modigliani and Miller’s
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Contents • Average stock level 16
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Contents • Operational result of
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Contents Insurance Sector in India
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2 Financial Management According to
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4 Financial Management SCOPE OF FIN
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6 Financial Management 3. Profit is
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8 Financial Management Traditional
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10 Financial Management Proper Use
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12 Financial Management Financial S
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14 Financial Management the operati
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16 Financial Management Solution Co
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18 Financial Management Exercise 3
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20 Financial Management Solution Sc
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22 Financial Management Solvency Ra
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24 Financial Management Debtors Tur
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26 Financial Management SOURCES OF
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28 Financial Management SECURITY FI
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30 Financial Management profit, the
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32 Financial Management 2. Cumulati
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34 Financial Management Features of
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36 Financial Management financial y
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38 Financial Management Short-term
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142 Financial Management = 2386500
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144 Financial Management As the pro
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146 Financial Management 12. From t
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150 Financial Management Capital Fi
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152 Financial Management Working Ca
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154 Financial Management NEEDS OF W
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156 Financial Management 5. Credit
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158 Financial Management Period Cov
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160 Financial Management 2. Moderat
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162 Financial Management Conservati
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166 Financial Management A proper p
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168 Financial Management Minimum Le
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170 Financial Management Ordering c
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172 Financial Management This analy
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(A) First in First out Method FIFO
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176 Financial Management 3. Specula
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178 Financial Management Opportunit
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180 Financial Management 1. Sales L
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182 Financial Management Percentage
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184 Financial Management Solution S
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188 Financial Management (iv) (v) H
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190 Financial Management (c) Work-i
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198 Financial Management 13. On 1 A
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202 Financial Management 7. Domesti
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206 Financial Management 11. IDBI J
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208 Financial Management In 1998 a
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212 Financial Management 4. FDI in
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214 Financial Management (b) SEBI s
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230 Financial Management • Global
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232 Financial Management Capital In
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234 Financial Management Subsidies
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236 Financial Management financial
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238 Financial Management Functions
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240 Financial Management • Touris
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242 Financial Management During the
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248 Financial Management The second
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254 Financial Management The number
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