Calculate the following with data(assumed) provided: Return on investment Operating leverage Financial leverage Combined leverage

Banking & FinanceFinance ManagementGrowth & Empowerment


Rs.
Sales (S)1000000
Variable cost (VC)375000
Fixed cost (FC)95000
Debt425000
Interest on debt10%
Equity capital590000

Solution

The solution is given below −

  • return on investment = EBIT/ (D + E) 
  • return on investment = (S – VC – FC)/ (D + E) 
  • return on investment = (1000000 – 375000 – 95000)/ (425000 + 590000) 
  • return on investment = 530000/ 1015000 
  • return on investment = 52.22%
  • operating leverage (OL) = (S – VC)/ EBIT 
  • operating leverage = (1000000 – 375000)/ 530000 
  • operating leverage = 625000/ 530000 
  • operating leverage = 1.18
  • financial leverage (FL) =EBIT/ EBT
  • financial leverage = 530000/ (EBIT – I)
  • financial leverage = 530000/ (530000 – (425000*10%))
  • financial leverage = 530000/ (530000- 42500)
  • financial leverage = 530000/ 487500
  • financial leverage = 1.087
  • combined leverage = OL * FL 
  • combined leverage = 1.18 * 1.087 
  • combined leverage = 1.28

Here,

EBIT = Earnings before interest and tax.

EBT = earnings before tax and after interest.

I = interest on debentures.

raja
Published on 25-Sep-2020 17:43:15
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