Thus, leverage reflects the responsiveness or influence of one variable over some other financial variables. In leverage analysis, the emphasis is on the measurement of the relationship of two variables rather than on measuring these variables. It is important to remember that leverage arises from the existence of fixed costs in a company.

High combined leverage shows the combined effect of a higher burden of fixed and interest cost consequently higher business & financial risk. As QPR Ltd. has higher combined leverage hence it has high business risk & financial risk as compared to ABC Ltd. High combined leverage shows combined effect of higher burden of fixed and interest cost consequently higher business & financial risk. As POR Ltd. has higher combined leverage hence it has high business risk & firancial risk as compared to ABC Ltd. DIGI Computers Ltd. is a manufacturer of computer systems.

MCQs on Financial and Strategic Management | Leverage

Here, the numerator is the dependent variable and the is the independent variable. Here’s your chance to find financial solutions to the most pressing problems your business may be facing from one of India’s best financial advisors. The Highly risky situation as it consists of large interest costs. ___ is the ratio of net operating income before fixed charges to net operating income after fixed charges. After breaking even last year, Citibank expects Paytm’s growth to continue, partly thanks to recognition of annual UPI payouts from the Indian government, along with decent Q4 figures.

Determine the likely level of EBIT if EPS is ₹ 6. A firm can finance its investments through debt and equity.In addition, companies may also use preference capital. The rate of interest on debt is fixed.Similarly the rate of dividend on preference shares is fixed, though preference dividend is paid from profit after tax.

Changes in revenues and changes in economic conditions, operating and financial expenses are few of the several contributing factors to the uncertainty of future cash flows. Introduction of debt capital into a firm’s capital structure intensifies the volatility of earnings per share . The fixed operating costs are ₹ 2,00,000 and variable operating cost ratio is 40%. A firm having higher DOL can experience a magnified effect on EBIT for a small change in sales revenue. But if there is decline in sales level, EBIT.

The variable costs are 40% of the sales while the fixed operating costs amount to ₹ 30,000. The amount of interest on long-term debts is ₹ 10,000. You are required to calculate the combined leverage. ABC Ltd. has an average selling price of ₹ 10 per unit.

• Financial leverage can be described as the extent to which a business or an investor is utilising the borrowed money.
• Students should practice Leverages – CS Executive Financial and Strategic Management MCQ Questions with Answers based on the latest syllabus.
• When interest on loan funds is less than return on investment .
• The Highly risky situation as it consists of large fixed costs.
• This might happen when the asset’s value declines or even interest rates attain unacceptable levels.

If sales rise by 1 % at the firm, then EBIT will rise by 3.5%. Networking Capital is the excess of current assets over current liabilities. Students should practice Leverages – CS Executive Financial and Strategic Management MCQ Questions with Answers based on the latest syllabus.

Advanced Financial Management

The Operating Leverage measures the effect of fixed operating costs, whereas Financial Leverage measures the effect of interest expenses. Operating Leverage influences Sales and EBIT but Financial Leverage affects EBIT and EPS. Operating Leverage arises due to the company’s cost structure. From the following data of Abhishek Ltd., compute the operating leverage, financial leverage, combined leverage.

If a business firm has a lot of variable costs as compared to fixed costs, then the firm is said to have high operating leverage. Financial leverage can be described as the extent to which a business or an investor is utilising the borrowed money. It is a measure of how much a firm uses equity & debt capital to finance its assets. As debt intake increases, so does a company’s financial leverage. Operating leverage 2.5; financial leverage 3; EPS ₹ 30; the market price per share ₹ 225; and capital 20,000 shares. It is proposed to raise a loan of ₹ 50,00,000 @18% for expansion.

Low operating leverage and high financial leverage. Rs. 10 lakhs in equity shares of Rs. 100 each and the balance through long-term borrowings at 9% interest p.a. Firms use Debt Capital as a strategy that contributes to magnify shareholder’s value or firm’s wealth maximization. ● The company avails debt financing by borrowing Rs 120 Crore, leaving it with a total capital of Rs 150 Crore.

High operating leverage shows higher burden of fixed cost. With the increase in fixed cost operating leverage diminishes. Highly risky situation as it consists of large fixed costs. Rs. 15 lakhs in equity shares of Rs. 100 each and the balance through preference shares with 12% dividend. In the case of ABC Ltd, the % increase in EBIT is 80% and % increase in sales is 50%.

● A company is formed with a Rs 30 Crore investment from investors . The study material of Eduncle helps me a lot. The unit wise questions and test series were helpful.

Everything on Tax and Corporate Laws of India

The tendency of sales to vary disproportionately with the fixed cost. Operating leverage is directly__ to business risk. Calculate the financial leverage taking EBIT level under base. Rs.10% Preference Share Capital1,00,000Equity Share Capital (Rs. 10 Shares)1,00,00012% Debenture75,000The amount of operating profit is Rs. 69,000.

The tendency of profit after tax to vary disproportionately with fixed cost. Degree of ………… is the ratio of the percentage increase in earning per share to the percentage increase in earnings before interest and taxes . Rs. 15 lakhs in equity shares of Rs. 100 each and the balance in 8% debentures. Let’s discuss an example to understand the concept of financial leverage. QPR Ltd. has high financial risk as compared to ABC Ltd.

Leverage Analysis -MCQ Exclusively Designed for CS Executive Financial and Strategic Management Paper BY CMA Chander Dureja

In the case of moneylenders agree to give loans to a company with greater leverage, the lender will expect greater interest rates to minimise the greater risk of default. If there are preference shares in capital structure then following formula has to be used to calculate the financial leverage. Financial managers can use this information in developing the firm’s financial policies.

The ratio of a company’s fixed expenses to variable costs over a certain period is known as operating leverage. A corporation is said to have significant operating leverage when its fixed expenses surpass its variable costs. Variations in sales volume are a concern for such a company, and the instability may impact EBIT and return on capital invested. If a business firm has a lot of fixed costs as compared to variable costs, then the firm is said to have high operating leverage.

Financial leverage plays a major role in deciding the optimum capital structure. The capital structure is concerned with the raising of long-term funds both from the shareholders and through debt. A financial manager has to decide about the ratio between fixed cost funds and equity share capital. The effects of debt on cost of capital and financial risk have to be considered before selecting a final capital structure.

As Small Pen Ltd. has higher financial leverage hence it has high financial risk as compared to Big Pen Ltd. Capital structure of the company consists of equity shares and preference shares. If EBIT increases by 6% taxable income increase by 6.9% (6 × 1.15). Operating leverage is the ratio of fixed cost to net operating income after tax.

May be reduce equally drastically or even be negated, i.e., a loss may be incurred. This means that in a down phase a firm may reach the breakeven point very quickly. That is the operating profit may become zero for a very small or marginal drop in sales. If the fixed costs are higher, the firm’s operating leverage and its operating risks are higher.

The tendency of profit before tax to vary disproportionately with sales. The amount of earnings per each outstanding share of a company’s stock. Through achieving leverage, organizations can grow exponentially faster due to access to far more resources than their assets would generally allow. In its second year, it reports an EBIT of ₹1000 Crore, an interest expense of ₹120 Crore & outstanding shares of 50 million. It’s resulting EPS will be ₹176 or (₹1000 Crore – ₹120 Crore) ÷ 50 million Shares. For example, assume Company XYZ reports an EBIT of ₹300 Crore in its first year of operations, an interest expense of ₹70 Crore & has 50 million Outstanding Shares.

Of shares9,0009,0009,000EPS120Perform reverse working downward to upward. Instead of issuing shares to obtain cash, corporations might utilise indebtedness to invest in specific processes to improve shareholder value. Industry asset turnover ratio is 1 whereas firm has asset turnover ratio 0.74 which is low as compared to industry. Industry asset turnover ratio is 1 whereas firm has asset turnover ratio 1.75 which is low as compared to industry. Industry asset turnover ratio is 1 whereas firm has asset turnover ratio 2.74 which is high as compared to industry.

If operating leverage arises because of rise by 1% at the firm, then EBIT will rise by 3.5%. If EBIT rises by 1% at the firm, then EPS will rise by 3.5%. If EBIT rises by 3.5% at the firm, then EPS will rise by 1%. If sales rise by 3.5% at the firm, then EBIT will rise by 1%. A simplified income statement of Abbiash Ltd. is given below. Take the data of above question and calculate P/V Ratio.

• In the case of liquidation, be it voluntary or involuntary, shareholders usually hold a claims position subordinate to that of debt holders.
• Therefore, this component of risk enters financial structure decisions as well.
• Calculate the degree of financial leverage for a firm when its EBIT is 20,00,000.
• As QPR Ltd. has higher combined leverage hence it has high business risk & financial risk as compared to ABC Ltd.

TUV Ltd. & WXY Ltd. both are more risky as compared to market as there operating leverages and betas are more than market. However, WXY Ltd. is more risky than market as well as TUV Ltd. ROI is greater than interest on loan funds and hence it has unfavourable financial leverage. ROI is greater than interest on loan funds and hence it has favourable financial leverage. ROI is equal to interest on loan funds and hence it has favourable financial leverage. ROI is less than interest on loan funds and hence it has no favourable financial leverage.

Calculate the Percentage of change in earnings per share if sales increased by 5%. While the Debt Equity Ratio is the most generally utilised leverage ratio, the three ratios listed above are also commonly employed in corporate finance to assess a company’s leverage. PQR Ltd. has high financial risk as compared to ABC Ltd. Compute the operating leverage for the three situations. Company is in less risk as compared to other firms in the industry. Company is in more risk as compared to other firms in the industry.

The tendency of sales to vary disproportionately with fixed cost. The overall debt divided by shareholder equity. This borrowing allows for the multiplication of gains and losses.