Page 391 - Corporate Finance PDF Final new link

BRILLIANT’S Leverage Analysis 391

Solution:
Given: Total Assets Turnover Ratio = 3 times
Total Assets (as per Balance Sheet) = ` 12,80,000
Sales
Total Assets Turnover Ratio =
Total Assets

Sales
 3 =
12,80,000
 Sales = 3 × 12,80,000
 Sales = ` 38,40,000
Since the P/V ratio is given 50%, the variable cost will also be 50% (100 – 50) of sales.
Let us now prepare Income statement
Income Statement

Particulars (`)

Sales NPP 38,40,000
Less: Variable Cost (50%) 19,20,000
Contribution 19,20,000
Less: Fixed cost 7,20,000
EBIT 12,00,000
Less: Interest (10% of Debentures) 32,000
EBT 11,68,000
Less: Tax @ 30% 3,50,400
EAT 8,17,600

Calculation of Leverages
Contribution 19,20,000
1. Operating Leverage = = = 1.60
EBIT 12,00,000

EBIT 12,00,000
2. Financial Leverage = = = 1.03 (approx.)
EBT 11,68,000
3. Combined Leverage = O.L. × F.L.
= 1.60 × 1.03 = 1.65
Calculation of EBIT, when EPS = 21
EAT
EPS =
No. of equity shares

EAT
 21 =  EAT = 21 × 8,000 = ` 1,68,000
8,000