UNIT III
SEC A
1. Define capital structure.
2. Write a note on Arbitrage Process.
3. List the patterns of Capital Structure.
4. Name various theories of capital structure.
5. Highlight the essentials of Sound capital Mix.
6. Outline the meaning of financial leverage.
7. Write a note on EBIT.
8. What is Capital Gearing?
9. Explain the term Financial Risk.
10. What is meant by Operating Leverage?
11. Define financial break-even point.
12. A firm has sales of ₹.10,00,000 variable cost ₹.7,00,000 and fixed cost
₹.2,00,000 and debt of ₹.5,00,000 at 10% rate of interest. What is the
operating leverage?
SEC B
1. Explain the terms Capitalisation, Capital Structure, and Financial
Structure.
2. What do you mean by EBIT and EPS? Elucidate the EBIT-EPS analysis.
3. Using imaginary figures show how to determine the value of the firm
under:
a) The Net Income Approach and
b) The Net Operating Income Approach.
4. Discuss briefly the risk-return trade-off to a financial manager while making
financial decisions related to Capital mix or Capital Structure.
5. Enumerate the essential features of an optimal Capital Mix.
6. A firm has sales of ₹.20,00,000, variable cost of ₹.14,00,000 fixed costs of
₹.4,00,000 and debentures of ₹.10,00,000 in its capital structure obtained @
10 percent. What are its financial leverage, operating leverage and combined
leverage?
7. Differentiate between Financial Structure and Capital Structure.
8. Differentiate capitalisation and capital structure.
9. X Ltd. is expecting an annual EBIT of ₹.1 lakh. The company has ₹.4 lakhs
in 10% debentures. The cost of equity capital or capitalisation rate is 12.5%.
You are required to calculate the total value of the firm according to the Net
Income Approach.
10. A company has sales of ₹.5,00,000, variable costs of ₹.3,00,000, fixed costs
of ₹.1,00,000 and long-term loans of ₹.4,00,000 at 10% rate of interest.
Calculate the composite leverage.
SEC C
1. Explain the different patterns of capital structure for a new company with
example
2. XYZ Ltd. expects earnings before interest and tax of ₹.6,00,000 and belongs
to risk class of 10%. You are required to calculate the value of the firm and
cost of equity capital (according to the NOI approach) if it employs 8% debt
to the extent of 20%, 40% or 60% of the total financial requirement of
₹.30,00,000.
3. Describe the factors determining Capital Structure.
4. "Operating risk is associated with cost structure, whereas financial risk is
associated with capital structure of a business concern." Critically examine
this statement.
5. Calculate degree of operating leverage, financial leverage and combined
leverage from the following data:
Sales 1,00,000 units @ 2 per unit -₹.2,00,000
Variable cost per unit @ Re. 0.70
Fixed Costs-₹.1,00,000
Interest charges-₹.3,668
6. Calculate operating leverage and financial leverage under situation A, B and
C and financial Plans I, II and III respectively from the following information
relating to the operation and capital structure of XYZ Co. Also find out the
combinations of operating and financial leverage which give the highest
value and the least value. How are these calculations useful to financial
manager in a company?
Installed capacity 12,000 Units
Actual Production and Sales 800 Units
Selling Price per unit ₹.15
Variable cost per unit ₹.10
Fixed Costs: Situation A ₹.1,000
Situation B ₹.2,000
Situation C ₹.3,000
Capital Structure: Financial Plan
I II III
₹. ₹. ₹.
Equity 5,000 7,500 2,500
Debt 5,000 2,500 7,500
Cost of Debt – 12%
7. A simplified income statement of Zenith Ltd. is given below.
Calculate and interpret its degree of operating leverage, degree of financial
leverage and degree of combined leverage.
Income Statement of Zenith Ltd. for the year ended 31st March 2021.
₹.
Sales 10,50,000
Variable Cost 7,67,000
Fixed Cost 75,000
EBIT 2,08,000
Interest 1,10,000
Taxes(30%) 29,400
Net Income 68,600
8. The following figures relate to two companies.
Particulars P LTD. (₹.in lakhs) Q LTD. (₹.in lakhs)
Sales 500 1000
Variable Cost 200 300
Contribution 300 700
Fixed Cost 150 400
EBIT 150 300
Interest 50 100
Profit Before Tax 100 200
You are required to calculate :
i) Operating, Financial and Combined Leverages for the two companies
and
ii) Comment on the relative risk position of them.
9. Calculate degree of operating leverage, financial leverage and combined
leverage from the following data:
Particulars ₹.
Sales 1,00,000 units @ 2 per unit 2,00,000
Variable cost per unit @ Re. 0.70
Fixed Costs 1,00,000
Interest charges 3,668
10. The capital structure of the Progressive Corporation Ltd., consists of an equity
share capital of ₹.10,00,000 (Shares of 10 par value) and ₹.10,00,000 of 20 %
debentures. Sales increased by 25% from 2,00,000 units to 2,50,000 units, the
selling price is 10 per unit, variable costs amount to ₹ 6 per unit and fixed
expenses amount to ₹ 2,50,000. Income tax rate is assumed to be 50 %
You are required to calculate the following:
(i) The percentage increase in earnings per share.
(ii) The degree of financial leverage at 2,00,000 units and 2,50,000 units.
(iii) The degree of operating leverage at 2,00,000 units and 2,50,000 units.
