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394 Corporate Finance BRILLIANT’S

Contribution 7,00,000
(a) Degree of Operating Leverage = = = 3.5
EBIT 2,00,000

EBIT 2,00,000
(b) Degree of Financial Leverage = = = 1.25
EBT 1,60,000
Illustration 4.3.5
The following figures relate to two companies: / {ZåZ{b{IV Am§H$‹S>o Xmo H§$nZrO go g§~§{YV h¢…
(` in lacs)

Particulars P. Ltd. Q. Ltd.
({ddaU) (P {b.) (Q {b.)

Sales / {dH«$¶ 500 1,000
Variable Cost / do[aE~b H$m°ñQ> 200 300

Contribution / ¶moJXmZ 300 700
Fixed Cost / {’$³ñS> H$m°ñQ> 150 400
EBIT 150 300
Interest / ã¶mO 50 100

Profit Before Tax / Q>¡³g Ho$ nhbo àm°{’$Q> 100 200
You are required to: / AmnH$mo:

(i) Calculate the operating, financial and combined leverage for the two companies; and
Xmo H§$nZrO Ho$ {bE Am°naoqQ>J, ’$m¶Z|{e¶b VWm H§$~mB§S> brdaoO H$s JUZm H$aZm h¡ VWm

(ii) Comment on the relative risk position of them. / CZH$s g§~§{YV [añH$ nmo[OeZ na {Q>ßnUr H$s{OE&
Solution:
(i) Calculation of Leverage (` in lacs)

Particulars P. Ltd. Q. Ltd.

300 700
Operating Leverage = Contribution/EBIT = 2 = 2.33
150 300

150 300
Financial Leverage = EBIT/PBT = 1.5 = 1.5
100 200
300 700
Combined Leverage = Contribution/PBT = 3 = 3.5
100 200