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ANSWERS OF MODEL TEST PAPER 3 
INTERMEDIATE: GROUP – II 
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT 
PAPER 6A : FINANCIAL MANAGEMENT 
PART I – Case Scenario based MCQs 
1. 1. (c) Calculation of cost of capital
Capital Weight Cost Product 
Debt 0.3 10% 3.00% 
Preference 0.2 11% 2.20% 
Equity 0.5 15% 7.50% 
Ko= 12.70% 
2. (a)
3. (c)
4. (d)
5. (a)
Calculation of CFAT 
Year 1 2 3 4 5 6 
A) No. of quick
deliveries p.d.
10,000  12,000  13,800  15,180  15,939  15,939  
B) No. of 
overnight
deliveries p.d.
2,000  2,400  2,760  3,036  3,188  3,188  
C) No. of quick
deliveries p.a.
36,50,000  43,80,000  50,37,000  55,40,700  58,17,735  58,17,735  
D) No. of 
overnight
deliveries p.a.
7,30,000  8,76,000  10,07,400  11,08,140  11,63,547  11,63,547  
E) Chargeable
quick deliveries
18,25,000  21,90,000  25,18,500  27,70,350  29,08,868  29,08,868  
F) No. of 
delivery partners 
1.5x(A+B)/ 
30 
600 720 828 911 956 956 
Revenue (in 
crores) 
From quick 
deliveries (QD) 
(E x 40) 7.30 8.76 10.07 11.08 11.64 11.64 
From QD seller 
commission 
(C x 700 x 
5%) 
12.775 15.330 17.630 19.392 20.362 20.362 
From Overnight 
delivery 
subscription  
(B/2 x 
5000) 
0.500 0.600 0.690 0.759 0.797 0.797 
523
Page 2


ANSWERS OF MODEL TEST PAPER 3 
INTERMEDIATE: GROUP – II 
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT 
PAPER 6A : FINANCIAL MANAGEMENT 
PART I – Case Scenario based MCQs 
1. 1. (c) Calculation of cost of capital
Capital Weight Cost Product 
Debt 0.3 10% 3.00% 
Preference 0.2 11% 2.20% 
Equity 0.5 15% 7.50% 
Ko= 12.70% 
2. (a)
3. (c)
4. (d)
5. (a)
Calculation of CFAT 
Year 1 2 3 4 5 6 
A) No. of quick
deliveries p.d.
10,000  12,000  13,800  15,180  15,939  15,939  
B) No. of 
overnight
deliveries p.d.
2,000  2,400  2,760  3,036  3,188  3,188  
C) No. of quick
deliveries p.a.
36,50,000  43,80,000  50,37,000  55,40,700  58,17,735  58,17,735  
D) No. of 
overnight
deliveries p.a.
7,30,000  8,76,000  10,07,400  11,08,140  11,63,547  11,63,547  
E) Chargeable
quick deliveries
18,25,000  21,90,000  25,18,500  27,70,350  29,08,868  29,08,868  
F) No. of 
delivery partners 
1.5x(A+B)/ 
30 
600 720 828 911 956 956 
Revenue (in 
crores) 
From quick 
deliveries (QD) 
(E x 40) 7.30 8.76 10.07 11.08 11.64 11.64 
From QD seller 
commission 
(C x 700 x 
5%) 
12.775 15.330 17.630 19.392 20.362 20.362 
From Overnight 
delivery 
subscription  
(B/2 x 
5000) 
0.500 0.600 0.690 0.759 0.797 0.797 
523
From OD seller 
commission 
(C x 750 x 
7%) 
3.83 4.60 5.29 5.82 6.11 6.11 
Total Revenue 24.41 29.29 33.68 37.05 38.90 38.90 
Cost (in crores) 
Advertising 7 8 10 0 0 0 
IT and customer 
care 
8 8 8 8 8 8 
Delivery partner 
salary 
(F x 15000) 0.90 1.08 1.24 1.37 1.43 1.43 
Delivery partner 
commission 
(C+D) x 20 8.76 10.51 12.09 13.30 13.96 13.96 
Depreciation on 
investment 
in year 0 
6 6 6 6 6 
on 
investment 
in year 2 
4 4 4 4 4 
on 
investment 
in year 4 
5 5 5 
Total Cost 30.66 37.59 41.33 37.66 38.40 32.40 
PBT -6.25 -8.30 -7.65 -0.61 0.51 6.51 
Less: Tax 1.56 2.08 1.91 0.15 -0.13 -1.63
PAT -4.69 -6.23 -5.74 -0.46 0.38 4.88 
Add: 
Depreciation 
6.00 10.00 10.00 15.00 15.00 9.00 
CFAT 1.31 3.77 4.26 14.54 15.38 13.88 
Computation of NPV 
Year Particulars Cash Flows 
(in crores) 
PVF @ 
12.7% 
PV 
(in crores) 
0 Investment -30 1 -30
1 Investment -20 0.887 -17.75
3 Investment -25 0.699 -17.46
1 Operating CFAT 1.31 0.887 1.16 
2 Operating CFAT 3.77 0.787 2.97 
3 Operating CFAT 4.26 0.699 2.98 
4 Operating CFAT 14.54 0.620 9.01 
5 Operating CFAT 15.38 0.550 8.46 
6 Operating CFAT 13.88 0.488 6.77 
6 Sale Proceeds (30+20+25)x2 150 0.488 73.21 
NPV 39.35 
524
Page 3


ANSWERS OF MODEL TEST PAPER 3 
INTERMEDIATE: GROUP – II 
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT 
PAPER 6A : FINANCIAL MANAGEMENT 
PART I – Case Scenario based MCQs 
1. 1. (c) Calculation of cost of capital
Capital Weight Cost Product 
Debt 0.3 10% 3.00% 
Preference 0.2 11% 2.20% 
Equity 0.5 15% 7.50% 
Ko= 12.70% 
2. (a)
3. (c)
4. (d)
5. (a)
Calculation of CFAT 
Year 1 2 3 4 5 6 
A) No. of quick
deliveries p.d.
10,000  12,000  13,800  15,180  15,939  15,939  
B) No. of 
overnight
deliveries p.d.
2,000  2,400  2,760  3,036  3,188  3,188  
C) No. of quick
deliveries p.a.
36,50,000  43,80,000  50,37,000  55,40,700  58,17,735  58,17,735  
D) No. of 
overnight
deliveries p.a.
7,30,000  8,76,000  10,07,400  11,08,140  11,63,547  11,63,547  
E) Chargeable
quick deliveries
18,25,000  21,90,000  25,18,500  27,70,350  29,08,868  29,08,868  
F) No. of 
delivery partners 
1.5x(A+B)/ 
30 
600 720 828 911 956 956 
Revenue (in 
crores) 
From quick 
deliveries (QD) 
(E x 40) 7.30 8.76 10.07 11.08 11.64 11.64 
From QD seller 
commission 
(C x 700 x 
5%) 
12.775 15.330 17.630 19.392 20.362 20.362 
From Overnight 
delivery 
subscription  
(B/2 x 
5000) 
0.500 0.600 0.690 0.759 0.797 0.797 
523
From OD seller 
commission 
(C x 750 x 
7%) 
3.83 4.60 5.29 5.82 6.11 6.11 
Total Revenue 24.41 29.29 33.68 37.05 38.90 38.90 
Cost (in crores) 
Advertising 7 8 10 0 0 0 
IT and customer 
care 
8 8 8 8 8 8 
Delivery partner 
salary 
(F x 15000) 0.90 1.08 1.24 1.37 1.43 1.43 
Delivery partner 
commission 
(C+D) x 20 8.76 10.51 12.09 13.30 13.96 13.96 
Depreciation on 
investment 
in year 0 
6 6 6 6 6 
on 
investment 
in year 2 
4 4 4 4 4 
on 
investment 
in year 4 
5 5 5 
Total Cost 30.66 37.59 41.33 37.66 38.40 32.40 
PBT -6.25 -8.30 -7.65 -0.61 0.51 6.51 
Less: Tax 1.56 2.08 1.91 0.15 -0.13 -1.63
PAT -4.69 -6.23 -5.74 -0.46 0.38 4.88 
Add: 
Depreciation 
6.00 10.00 10.00 15.00 15.00 9.00 
CFAT 1.31 3.77 4.26 14.54 15.38 13.88 
Computation of NPV 
Year Particulars Cash Flows 
(in crores) 
PVF @ 
12.7% 
PV 
(in crores) 
0 Investment -30 1 -30
1 Investment -20 0.887 -17.75
3 Investment -25 0.699 -17.46
1 Operating CFAT 1.31 0.887 1.16 
2 Operating CFAT 3.77 0.787 2.97 
3 Operating CFAT 4.26 0.699 2.98 
4 Operating CFAT 14.54 0.620 9.01 
5 Operating CFAT 15.38 0.550 8.46 
6 Operating CFAT 13.88 0.488 6.77 
6 Sale Proceeds (30+20+25)x2 150 0.488 73.21 
NPV 39.35 
524
2. (d) FL=%change in NP/%change in EBIT=6.9/6=1.15
3. (c)  Since IRR of projects of company is greater than its cost of capital, the
company should retain all ist earnings i.e. DPR = 0. As per walter Po = 
[0 + (0.15/0.125)10]/0.125 = 96 
4. (d)  180 days
PART II – Descriptive Questions 
1. (a)  Determination of specific costs
(i) Cost Debt (Kd)  =
(RV NP)
Interest (1 t)
N
(RV NP)
2
-
-+
+
 = 
( 100 96)
11(1 0.35)
10years
( 100 96)
2
-
-+
+
``
`
``
= 
7.15 0.4
98
+ ``
`
 = 0.077 or 7.70% 
(ii) Cost of Preference Shares (K
p
) =
(RV NP)
PD
N
(RV NP)
2
-
+
+
 = 
( 100 95)
12
10years
( 100 95)
2
-
+
+
``
`
``
= 
12 0.5
97.5
+ ``
`
 = 0.1282 or 12.82% 
(iii) Cost of Equity shares (K
e
) =
1
0
D
G
P
+ =
2
0.07
22 2
+
-
` 
` `
 = 0.17 or 17% 
I – Interest, t – Tax, RV- Redeemable value, NP- Net proceeds, N- No. of 
years, PD- Preference dividend, D1- Dividend at the end of the year, P0- 
Price of share (net) 
Using these specific costs we can calculate the book value and market 
value weights as follows: 
(a) Weighted Average Cost of Capital (K
0
) based on Book value
weights
Source of capital Book value 
(BV) 
Specific cost (k) 
(%) 
Total costs 
[BV (×) k] 
Debentures ` 8,00,000 7.7 ` 61,600 
Preferences 
shares  
2,00,000 12.8 25,600 
Equity shares 10,00,000 17.0 1,70,000 
20,00,000 2,57,200 
K
0 
= ` 2,57,200/` 20,00,000 = 12.86 per cent
525
Page 4


ANSWERS OF MODEL TEST PAPER 3 
INTERMEDIATE: GROUP – II 
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT 
PAPER 6A : FINANCIAL MANAGEMENT 
PART I – Case Scenario based MCQs 
1. 1. (c) Calculation of cost of capital
Capital Weight Cost Product 
Debt 0.3 10% 3.00% 
Preference 0.2 11% 2.20% 
Equity 0.5 15% 7.50% 
Ko= 12.70% 
2. (a)
3. (c)
4. (d)
5. (a)
Calculation of CFAT 
Year 1 2 3 4 5 6 
A) No. of quick
deliveries p.d.
10,000  12,000  13,800  15,180  15,939  15,939  
B) No. of 
overnight
deliveries p.d.
2,000  2,400  2,760  3,036  3,188  3,188  
C) No. of quick
deliveries p.a.
36,50,000  43,80,000  50,37,000  55,40,700  58,17,735  58,17,735  
D) No. of 
overnight
deliveries p.a.
7,30,000  8,76,000  10,07,400  11,08,140  11,63,547  11,63,547  
E) Chargeable
quick deliveries
18,25,000  21,90,000  25,18,500  27,70,350  29,08,868  29,08,868  
F) No. of 
delivery partners 
1.5x(A+B)/ 
30 
600 720 828 911 956 956 
Revenue (in 
crores) 
From quick 
deliveries (QD) 
(E x 40) 7.30 8.76 10.07 11.08 11.64 11.64 
From QD seller 
commission 
(C x 700 x 
5%) 
12.775 15.330 17.630 19.392 20.362 20.362 
From Overnight 
delivery 
subscription  
(B/2 x 
5000) 
0.500 0.600 0.690 0.759 0.797 0.797 
523
From OD seller 
commission 
(C x 750 x 
7%) 
3.83 4.60 5.29 5.82 6.11 6.11 
Total Revenue 24.41 29.29 33.68 37.05 38.90 38.90 
Cost (in crores) 
Advertising 7 8 10 0 0 0 
IT and customer 
care 
8 8 8 8 8 8 
Delivery partner 
salary 
(F x 15000) 0.90 1.08 1.24 1.37 1.43 1.43 
Delivery partner 
commission 
(C+D) x 20 8.76 10.51 12.09 13.30 13.96 13.96 
Depreciation on 
investment 
in year 0 
6 6 6 6 6 
on 
investment 
in year 2 
4 4 4 4 4 
on 
investment 
in year 4 
5 5 5 
Total Cost 30.66 37.59 41.33 37.66 38.40 32.40 
PBT -6.25 -8.30 -7.65 -0.61 0.51 6.51 
Less: Tax 1.56 2.08 1.91 0.15 -0.13 -1.63
PAT -4.69 -6.23 -5.74 -0.46 0.38 4.88 
Add: 
Depreciation 
6.00 10.00 10.00 15.00 15.00 9.00 
CFAT 1.31 3.77 4.26 14.54 15.38 13.88 
Computation of NPV 
Year Particulars Cash Flows 
(in crores) 
PVF @ 
12.7% 
PV 
(in crores) 
0 Investment -30 1 -30
1 Investment -20 0.887 -17.75
3 Investment -25 0.699 -17.46
1 Operating CFAT 1.31 0.887 1.16 
2 Operating CFAT 3.77 0.787 2.97 
3 Operating CFAT 4.26 0.699 2.98 
4 Operating CFAT 14.54 0.620 9.01 
5 Operating CFAT 15.38 0.550 8.46 
6 Operating CFAT 13.88 0.488 6.77 
6 Sale Proceeds (30+20+25)x2 150 0.488 73.21 
NPV 39.35 
524
2. (d) FL=%change in NP/%change in EBIT=6.9/6=1.15
3. (c)  Since IRR of projects of company is greater than its cost of capital, the
company should retain all ist earnings i.e. DPR = 0. As per walter Po = 
[0 + (0.15/0.125)10]/0.125 = 96 
4. (d)  180 days
PART II – Descriptive Questions 
1. (a)  Determination of specific costs
(i) Cost Debt (Kd)  =
(RV NP)
Interest (1 t)
N
(RV NP)
2
-
-+
+
 = 
( 100 96)
11(1 0.35)
10years
( 100 96)
2
-
-+
+
``
`
``
= 
7.15 0.4
98
+ ``
`
 = 0.077 or 7.70% 
(ii) Cost of Preference Shares (K
p
) =
(RV NP)
PD
N
(RV NP)
2
-
+
+
 = 
( 100 95)
12
10years
( 100 95)
2
-
+
+
``
`
``
= 
12 0.5
97.5
+ ``
`
 = 0.1282 or 12.82% 
(iii) Cost of Equity shares (K
e
) =
1
0
D
G
P
+ =
2
0.07
22 2
+
-
` 
` `
 = 0.17 or 17% 
I – Interest, t – Tax, RV- Redeemable value, NP- Net proceeds, N- No. of 
years, PD- Preference dividend, D1- Dividend at the end of the year, P0- 
Price of share (net) 
Using these specific costs we can calculate the book value and market 
value weights as follows: 
(a) Weighted Average Cost of Capital (K
0
) based on Book value
weights
Source of capital Book value 
(BV) 
Specific cost (k) 
(%) 
Total costs 
[BV (×) k] 
Debentures ` 8,00,000 7.7 ` 61,600 
Preferences 
shares  
2,00,000 12.8 25,600 
Equity shares 10,00,000 17.0 1,70,000 
20,00,000 2,57,200 
K
0 
= ` 2,57,200/` 20,00,000 = 12.86 per cent
525
(b) Weighted Average Cost of Capital (K
0
) based on market value
weights
Source of 
Capital 
Market Value 
(MV) 
Specific cost 
(k) (%)
Total costs 
[MV (×) k] 
Debentures ` 8,80,000 7.7 ` 67,760, 
Preference 
shares 
2,40,000 12.8 30,720 
Equity 
shares 
22,00,000 17.0 3,74,000 
Total 
capital 
33,20,000 4,72,480 
K
0 
= ` 4,72,480/` 33,20,000 = 14.23 per cent
(b) Total Assets = ` 400 crores 
Total Asset Turnover Ratio = 2.5 
Hence, Total Sales = 400 ? 2.5 = ` 1000 crores 
Computation of Profits after Tax (PAT) 
(` in crores) 
Sales 1000 
Less: Variable operating cost @ 65%    650 
Contribution   350 
Less: Fixed cost (other than Interest)  80 
EBIT   270 
Less: Interest on debentures (15% ? 200)  30 
EBT   240 
Less: Tax 40%    96 
EAT 144 
(i) Earnings per share
? 
 144 crores
EPS
10 crore equity shares
=
`
= ` 14.40 
(ii) Operating Leverage
Operating leverage = 
Contribution 350
EBIT 270
= = 1.296
It indicates the choice of technology and fixed cost in cost structure.
It is level specific.  When firm operates beyond operating break-
even level, then operating leverage is low.  It indicates sensitivity
of earnings before interest and tax (EBIT) to change in sales at a
particular level.
526
Page 5


ANSWERS OF MODEL TEST PAPER 3 
INTERMEDIATE: GROUP – II 
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT 
PAPER 6A : FINANCIAL MANAGEMENT 
PART I – Case Scenario based MCQs 
1. 1. (c) Calculation of cost of capital
Capital Weight Cost Product 
Debt 0.3 10% 3.00% 
Preference 0.2 11% 2.20% 
Equity 0.5 15% 7.50% 
Ko= 12.70% 
2. (a)
3. (c)
4. (d)
5. (a)
Calculation of CFAT 
Year 1 2 3 4 5 6 
A) No. of quick
deliveries p.d.
10,000  12,000  13,800  15,180  15,939  15,939  
B) No. of 
overnight
deliveries p.d.
2,000  2,400  2,760  3,036  3,188  3,188  
C) No. of quick
deliveries p.a.
36,50,000  43,80,000  50,37,000  55,40,700  58,17,735  58,17,735  
D) No. of 
overnight
deliveries p.a.
7,30,000  8,76,000  10,07,400  11,08,140  11,63,547  11,63,547  
E) Chargeable
quick deliveries
18,25,000  21,90,000  25,18,500  27,70,350  29,08,868  29,08,868  
F) No. of 
delivery partners 
1.5x(A+B)/ 
30 
600 720 828 911 956 956 
Revenue (in 
crores) 
From quick 
deliveries (QD) 
(E x 40) 7.30 8.76 10.07 11.08 11.64 11.64 
From QD seller 
commission 
(C x 700 x 
5%) 
12.775 15.330 17.630 19.392 20.362 20.362 
From Overnight 
delivery 
subscription  
(B/2 x 
5000) 
0.500 0.600 0.690 0.759 0.797 0.797 
523
From OD seller 
commission 
(C x 750 x 
7%) 
3.83 4.60 5.29 5.82 6.11 6.11 
Total Revenue 24.41 29.29 33.68 37.05 38.90 38.90 
Cost (in crores) 
Advertising 7 8 10 0 0 0 
IT and customer 
care 
8 8 8 8 8 8 
Delivery partner 
salary 
(F x 15000) 0.90 1.08 1.24 1.37 1.43 1.43 
Delivery partner 
commission 
(C+D) x 20 8.76 10.51 12.09 13.30 13.96 13.96 
Depreciation on 
investment 
in year 0 
6 6 6 6 6 
on 
investment 
in year 2 
4 4 4 4 4 
on 
investment 
in year 4 
5 5 5 
Total Cost 30.66 37.59 41.33 37.66 38.40 32.40 
PBT -6.25 -8.30 -7.65 -0.61 0.51 6.51 
Less: Tax 1.56 2.08 1.91 0.15 -0.13 -1.63
PAT -4.69 -6.23 -5.74 -0.46 0.38 4.88 
Add: 
Depreciation 
6.00 10.00 10.00 15.00 15.00 9.00 
CFAT 1.31 3.77 4.26 14.54 15.38 13.88 
Computation of NPV 
Year Particulars Cash Flows 
(in crores) 
PVF @ 
12.7% 
PV 
(in crores) 
0 Investment -30 1 -30
1 Investment -20 0.887 -17.75
3 Investment -25 0.699 -17.46
1 Operating CFAT 1.31 0.887 1.16 
2 Operating CFAT 3.77 0.787 2.97 
3 Operating CFAT 4.26 0.699 2.98 
4 Operating CFAT 14.54 0.620 9.01 
5 Operating CFAT 15.38 0.550 8.46 
6 Operating CFAT 13.88 0.488 6.77 
6 Sale Proceeds (30+20+25)x2 150 0.488 73.21 
NPV 39.35 
524
2. (d) FL=%change in NP/%change in EBIT=6.9/6=1.15
3. (c)  Since IRR of projects of company is greater than its cost of capital, the
company should retain all ist earnings i.e. DPR = 0. As per walter Po = 
[0 + (0.15/0.125)10]/0.125 = 96 
4. (d)  180 days
PART II – Descriptive Questions 
1. (a)  Determination of specific costs
(i) Cost Debt (Kd)  =
(RV NP)
Interest (1 t)
N
(RV NP)
2
-
-+
+
 = 
( 100 96)
11(1 0.35)
10years
( 100 96)
2
-
-+
+
``
`
``
= 
7.15 0.4
98
+ ``
`
 = 0.077 or 7.70% 
(ii) Cost of Preference Shares (K
p
) =
(RV NP)
PD
N
(RV NP)
2
-
+
+
 = 
( 100 95)
12
10years
( 100 95)
2
-
+
+
``
`
``
= 
12 0.5
97.5
+ ``
`
 = 0.1282 or 12.82% 
(iii) Cost of Equity shares (K
e
) =
1
0
D
G
P
+ =
2
0.07
22 2
+
-
` 
` `
 = 0.17 or 17% 
I – Interest, t – Tax, RV- Redeemable value, NP- Net proceeds, N- No. of 
years, PD- Preference dividend, D1- Dividend at the end of the year, P0- 
Price of share (net) 
Using these specific costs we can calculate the book value and market 
value weights as follows: 
(a) Weighted Average Cost of Capital (K
0
) based on Book value
weights
Source of capital Book value 
(BV) 
Specific cost (k) 
(%) 
Total costs 
[BV (×) k] 
Debentures ` 8,00,000 7.7 ` 61,600 
Preferences 
shares  
2,00,000 12.8 25,600 
Equity shares 10,00,000 17.0 1,70,000 
20,00,000 2,57,200 
K
0 
= ` 2,57,200/` 20,00,000 = 12.86 per cent
525
(b) Weighted Average Cost of Capital (K
0
) based on market value
weights
Source of 
Capital 
Market Value 
(MV) 
Specific cost 
(k) (%)
Total costs 
[MV (×) k] 
Debentures ` 8,80,000 7.7 ` 67,760, 
Preference 
shares 
2,40,000 12.8 30,720 
Equity 
shares 
22,00,000 17.0 3,74,000 
Total 
capital 
33,20,000 4,72,480 
K
0 
= ` 4,72,480/` 33,20,000 = 14.23 per cent
(b) Total Assets = ` 400 crores 
Total Asset Turnover Ratio = 2.5 
Hence, Total Sales = 400 ? 2.5 = ` 1000 crores 
Computation of Profits after Tax (PAT) 
(` in crores) 
Sales 1000 
Less: Variable operating cost @ 65%    650 
Contribution   350 
Less: Fixed cost (other than Interest)  80 
EBIT   270 
Less: Interest on debentures (15% ? 200)  30 
EBT   240 
Less: Tax 40%    96 
EAT 144 
(i) Earnings per share
? 
 144 crores
EPS
10 crore equity shares
=
`
= ` 14.40 
(ii) Operating Leverage
Operating leverage = 
Contribution 350
EBIT 270
= = 1.296
It indicates the choice of technology and fixed cost in cost structure.
It is level specific.  When firm operates beyond operating break-
even level, then operating leverage is low.  It indicates sensitivity
of earnings before interest and tax (EBIT) to change in sales at a
particular level.
526
(iii) Financial Leverage
EBIT 270
Financial Leverage = = =1.125
EBT 240
The financial leverage is very comfortable since the debt service 
obligation is small vis-à-vis EBIT. 
(iv) Combined Leverage
Combined Leverage = 
Contribution EBIT
EBIT EBT
? Or Operating Leverage x
Financial Leverage
= 1.296 ? 1.125 = 1.458
The combined leverage studies the choice of fixed cost in cost
structure and choice of debt in capital structure.  It studies how
sensitive the change in EPS is vis-à-vis change in sales.
(c) Working notes:
1. Computation of Current Assets and Current Liabilities:
Current Assets
Current Liabilities
= 
2.5
1
or 
Current Assets Current Liabilities
 =  
2.5 1
 = k (say) 
Or, Current Assets = 2.5 k and Current Liabilities = k 
Or, Working capital = (Current Assets - Current Liabilities) 
Or, `2,40,000  =   k (2.5 - 1) = 1.5 k 
Or, k  = `1,60,000 
?  Current liabilities  = `1,60,000 
Current assets = `1,60,000 ? 2.5 = `4,00,000 
2. Computation of Inventories
Liquid ratio =
s liabilitie Current  
assets  Liquid
Or, 1.5  = 
1,60,000
s Inventorie  -  assets Current 
`
Or, 1.5 ? `1,60,000 = `4,00,000 - Inventories 
Or, Inventories     = `1,60,000 
3. Computation of Proprietary fund; Fixed assets; Capital and
Trade payables
Proprietary ratio   =  75 . 0
fund y Proprietar
assets  Fixed
= 
? Fixed assets = 0.75 Proprietary fund 
and Net working capital  = 0.25 Proprietary fund 
527
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