Page 90 - DMGT409Basic Financial Management

Unit 5: Capital Structure Decisions

lakh, 10 per cent debt capital. Calculate operating leverage and fi nancial leverage. ` 10 equity Notes
and 50 per cent tax rate.
Solution:

Calculation of EPS
Particulars Current position Expected change Percentage of change
Sales Revenue 15,00,000 18,75,000 25
Less: Variable cost 9,00,000 11,25,000 (1)
Contribution 6,00,000 7,50,000
Less: Fixed cost 2,50,000 2,50,000
EBIT 3,50,000 5,00,000 42.86
Less: Interest 2,00,000 2,00,000
EBT 1,50,000 3,00,000
Less: Tax 50% 75,000 1,50,000
EAT 75,000 1,50,000
Less: Preference dividend --- ---
Earnings available to shareholder 75,000 1,50,000
EPS 0.375 0.75 100%

Working Notes

1. Variable cost in percentage of Sales:
Total variable cost 9,00,000
VC % = × 100 = × 100 = 60 per cent
Sales 15,00,000

Increase in variable cost = 3,75,000 x 60/100 = 2,25,000
Total variable cost = 9,00,000 + 2,25,000 = ` 11,25,000
2. Percentage change in EBIT:
Increase or decrease in EBIT × 100 = 1,50,000 × 100 = 42.86 percent

Base EBIT 3,50,000
3. Interest on Debt:
20
20,00,000 × = ` 4,00,000
100
4. EPS
Earnings available to shareholders
EPS =
No. of ordinary shares

Current position = 75000 ÷ 2,00,000 = 0.375
Expected change = 1,50,000 ÷ 2,00,000 = 0.75
Contribution % change in EBIT
(a) Operating Leverage = or
EBIT % change in Sales
6,00,000 42.86
= or = 1.714
3,50,000 25

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