Question Paper Problems 2008-2012

1. Calculate the EPS of solid ltd and sound ltd, assuming

I. 20%before tax rate of returns on assets
II. 10% before tax rate of return on assets based on the following data:
Assuming 50% income tax in both cases
Particulars Solid ltd (rs. Lakhs) Sound ltd.(Rs.lakh)
Assets 100 100
Debt - 50
(12%debenture&loan)
Equity 100 50
(shares of Rs, 10 (shares of Rs.10 each)
each)

Give you comment on the financial leverage. (07 marks)

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2. XYZ Ltd…, is a established company which requires a further sum of Rs
30,00,000 for its expansion scheme. Apart from the original equity capital of
Rs 30,00,000 of Rs 100 each. The director have the following plan for
expansion :
a) Whole amount to be raised through equity shares.
b) Rs 10,00,000 in equity shares and balance amount in 8% debenture.
c) All in debentures @8%
d) Rs 10,00,000 in 12% preference shares and balance in equity.
The expected EBIT is Rs 8,00,000 and tax rate applicable is 50%.
Analyze the options and select the best option. (10 marks)

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3. The selected financial data for X,Y and Z companies for the year ended
March 31 are as follows:
Particulars X Y Z
Variable expenses as a percentage 66.67 75 50
of sales
Interest expenses 200 300 1000
DOL 5 6 2
DFL 3 4 2
Income tax rate 0.35 0.35 0.35
Prepare income statement for X, Y and Z companies.

4. From the following prepare income statements of A, B and C. Briefly

comment on each firm’s performance. ( 10 marks)

Particulars Firm A Firm B Firm C

Financial leverage 3:1 4:1 2:1
Interest ( Rs ) 200 300 1000
Operating leverage 4:1 5:1 3:1
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 Variable cost as a % of sales 66.67% 75% 50%
Income-tax rate 45% 45% 45%

5. A company has sales of Rs 5,00,000, variable cost of Rs 3,00,000, fixed cost

of Rs 1,00,000 and long term loans of Rs 4,00,000 at 10% rate of interest .
Calculate the operating, financial and combined leverage. (10 marks)

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 6. The selected financial data of ABC company for the year ended 31.3.08 were
as follows:
A B C
Variable exp. On a percentage of sales 66.66% 75% 50%
Interest expenses Rs 200 Rs 300 Rs 1000
Deg. Of op. leverage 5-1 6–1 2–1
Deg. Of fin. Leverage 3–1 4–1 2–1
Income tax rate 50% 50% 50%
Prepare the income statement for ABC Company. (10 marks)

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7. Oriental Ltd. Has currently an ordinary share capital of Rs.25 lakhs, consisting
of 25,000 shares of Rs.100/- each. the management is planning to raise
another Rs.20 lakhs to finance major expansion programme, through one of
four possible financial plans,
a) Entirely through ordinary shares.
b) Rs.10 lakh through ordinary shares and Rs.10 lakh in 8% long term
loan.
c) Rs.5 lakh through ordinary shares and Rs.15 lakh through 9% loan
(LT)
d) Rs.10 lakh through ordinary shares and Rs.10 lakh through preference
shares with 5% dividend.

The company’s expected earnings before interest and taxes (EBIT) will be
Rs.8 lakh. Assuming a corporate tax rate of 50% determine the EPS in
each in each alternative and comment, which alternative is best and why?

(10 marks)

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8. ABC LTD needs Rs.10 lakh for expansion. the expansion is expected to yield
16% on investment ( before interest and tax payment ). Firm is planning to
raise funds through debt and equity and the objective is to maximize the EPS.
It the firm borrows in excess of 4,00,000 the cost of debts would go up to 12%
from 10% and the MPS would drop fromRs.25 to Rs.20 . the tax rate
applicable is 50%. Determine EPS at three alternatives of financing mix
i) Rs.3,00,000 debt
ii) Rs5,00,000 debt
iii) Rs 7,00,000 debt in the capital structure . (07 marks)

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9. A firm’s sales , variable cost and fixed cost amount to Rs 75,00,000, Rs
42,00,000 and Rs 6,00,000 respectively . it has borrowed Rs 45,00,000 at
9% and its equity capitals Rs 55,00,000.
i) What is the firm’s ROI?
ii) Does it have favorable financial leverage?
iii) What are the operating, financial and combined leverage?
iv) If the sales drop to Rs 50,00,000, what will be the new EBIT be?
v) At what level will the EBT of the firm equal to zero?
vi) If the firm belongs to an industry whose asset turnover is 3, does it
have a high or low asset leverage? (10 marks)

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`10. A company capital structure consists of the following:

Equity shares of Rs100 each Rs20,00,000

Retained earnings Rs10,00,000

9% preference share Rs12,00,000

7% debentures Rs8,00,000

Rs 50,00,000

The company earn 12% on its capital . the income tax rate is 50% .the company
requires a sum of Rs25,00,000 to finance its expansion program for which the following
alternatives are available to it:

I) Issue of 20,00 equity shares at premium of Rs25 per shares

II) Issue of 10% preference share
III) Issue of 8% debentures

Which of the three financing alternative would you recommend and why?