1. Calculate the operating and combined leverages from the following information.

(E)
Sales

Rs.50, 000

Variable Cost

Rs.25, 000

Interest

Rs.5, 000

Fixed Cost

Rs.15, 000

2. The operating and cost data of Ashok Ltd. are as follows: (E)
Sales 40,000 units at Rs.10 per unit.
Variable cost at Rs 7-50 per unit
Fixed costs Rs.80, 000 (including 15% interest on Rs.2, 00,000)
Calculate the operating, financial and combined leverages.
3. Calculate operating and financial leverages from the following particulars. (E)
Units sold 5,000

Selling price p.u. Rs.30

Variable cost per unit Rs.20

EBIT Rs.30, 000

10% Public debt Rs.1, 00,000

4. Calculate operating leverage for maruti LTD. From the following information: (E)
No. of units produced

Rs.50, 000

Selling price per unit

Rs.50

Variable cost per unit

Rs.20

Fixed cost per unit at current level of salesRs.15.What will be the new operating
leverage, if the variable cost is Rs.30.per unit.
5. The following projections have been in respect of companies X and Y (N)
Particulars

Company x

Company y

Volume of output & sales 80,000 units 1,00,000 units

Variable cost per unit

Rs.4

Rs.3

Fixed cost

Rs.2,40,000

Rs.2,50,000

Interest burden on debit

Rs.1,20,000

Rs.50,000

Selling price per unit

Rs.10

Rs.8

On the basis of above information calculate (a) operating leverage (b) financial
leverage and (c) combined leverage (d) operating break-even points (e) financial
break-even point.

6. The capital structure of Bata Ltd. consists of Equity share capital of Rs.1,00,000 and
8%,Debentures of Rs.50,000.The fixed costs are Rs.10,000.You are required to
calculate the operating and financial leverages when earnings before interest and tax
is Rs.20,000. (N)
7. Income statement of P.N.R.Ltd.is given below: (C)
Rs.
Sales

10,50,000

Variable cost

7,67,000

Fixed cost

75,000

EBIT

2,08,000

Interest

1,10,000

Tax

29,400

Net income

68,600

No. of equity shares

4,000

Calculate:
(a) Operating leverages (b) Financial leverages (C) combined leverages
(d) Earnings per share (EPS)
8. From the following information, find out the degree of operating leverage in the year
2005. (E)
EBIT (2004) Rs.40, 000

EBIT (2005) Rs.50, 000

Sales (2004)

1, 50,000 units

Sales (2005) 1, 80,000 units

9. Following informations are taken from the books of a company. (E)
Selling price
Variable cost

Rs.28 per unit

Rs.18.per unit

Breakeven point 4000 units

You are required to find out the degree of operating and financial averages for
(a) 5,000 units of output and (b) 6,000 Units of output.
10. The following figures relate to two companies. (C)
(Rs. in. lakhs )
P. Ltd.

Q. Ltd

Sales

500

1,000

Less: Variable Cost

200

300

Contribution

300

700

Less: Interest

150

400

EBIT

150

300

Less: Interest

50

100

Profit After Tax (PAT)

100

200

Comment on the relative risk position of two companies.

11. Moon Ltd. and Star Ltd. have provided you with the following informations.
Moon Ltd

Star Ltd.

Sales (in units)

20,000

20,000

Price per unit

Rs.50

Rs.50

Variable cost per unit

Rs.20

Rs.25

Fixed Operating cost

Rs.4,00,000

Rs.3,00,000

Fixed Financing Cost

Rs.1,00,000

Rs.50,000

Which firm do you consider to be more risky and why?

12. The following is the Balance sheet of ITC Ltd.
Balance Sheet
Rs.
Equity Capital (Rs.10

Rs.

60,0000

Net Fixed assets

1,50,000

10% Long-term debt

80,000

Current assets

50,000

Retained Earnings

20,000

Current Liabilities

40,000

per share)

2,00,000

2,00,000

The companys total assets turnover ratio is 3. Its fixed operating cost is Rs.1,00,000
and variable operating cost ratio is 40% . The Income tax rate is 50%.
i.

Calculate all the three types of leverages.

ii.

Determine the likely EBIT if EPS is

(A) Re.1 (B) Re.3 (C) Rs. Zero

13. A. Find the operating leverages from the following data:

Sales

Rs.50,000

Variable cost

60%

Fixed cost

Rs.12,000

b. Find the financial leverage from the following data:

Net Worth

Rs.25,00,000

Debt/Equity

3/1

Interest rate

12%

Operating Profit

Rs.2,00,000

14. From the following, prepare income statement for company X and Y.
Company X

Company Y

Financial leverage

3:1

4:1

Interest

Rs.200

Rs.600

Operating leverage

4:1

5:1

Variable

cost

as

a 75%

50%

45%

45%

percentage of sales
Income tax

15. Explain the term leverage. What are its types? (E)
16. What is operating leverage? Explain its significance? (E)
17. What is financial leverage? Discuss its significance? (N)
18. What is composite leverages? How it is measured? (C)
19. What is financial risk? How it differs from operating risk? (N)
20. Define operating and financial leverage.

How can you measure the degree of

operating and financial leverage? (C)

UNIT-V
1. What do you understand by capital budgeting? Examine its need and importance? (E)
2. How capital expenditure decisions are classified? (N)

3. Briefly explain the process of capital budgeting? (N)

4. What are the factors which influence capital expenditure decisions? (C)
5. What is pay-back period? What are is merits and demerits? (E)
6. Explain the various methods of evaluating capital expenditure decisions.(C)
7. What is accounting rate of return? What are its merits? (N)
8. What is discounted cash flow method? What are its merits and demerits? (E)
9. What is cut-off rate? (E)
10. Write a short note on capital rationing. (E)
11. A Project costs Rs.1,00,000 and yields an annual cash inflow of Rs.20,000 for 7 years.
Calculate payback period. (E)
12. Calculate payback period for a project which require a cash outlay of Rs.10,000 and
generates cash inflows of Rs.2,000, Rs.4,000, Rs.3,000 and Rs.2,000 in the first,
second, third and fourth year respectively. (E)
13. A Project cost Rs.5,00,000 and yields annually a profit of Rs.80,000 after depreciation
at 12% p.a. but before tax of 50%. Calculate payback period. (E)
14. There are two projects A and B. The cost of the project is Rs.30,000 in each case.
The cash inflows are as under. (N)
Cash flows
Year

Project A

Project B

10,000

2,000

2.

10,000

4,000

3.

10,000

24,000

Calculate payback period.

15. A Company has to choose one of the following two mutually exclusive projects.
Investment required for each project is Rs.15000.Both the projects have to be
depreciated on straightline basis. The tax rate is 50%. (N)

Year

Profit before depreciation

Project A (Rs)

Project B (Rs)

4,200

4,200

4,800

4,500

7,000

4,000

7,000

5,000

2,000

10,000

Calculate pay-back period.

16. A Ltd; is producing articles mostly by manual labour and is considering to replace it
by a new machine. There are two alternative models X and Y of the new machine.
Prepare a statement of profitability showing the payback period from the following
information. Ignore taxation. (C )
Machine X

Machine Y

Estimated life of machine

4 years

5 years

Cost of machine

Rs.9000

Rs.18,000

Estimated saving in scrap

Rs.500

Rs.800

Rs.6,000

Rs.8,000

Rs.800

Rs.1,000

Rs.1,200

Rs.1,800

Estimated saving in direct

wages
Additional

cost

of

maintenance
Additional cost of super

17. R Ltd; is considering the purchase of new machine which will carry out the operations
performed by labour. Damsel and shylock are alternative models. From the following
information, you are required to prepare a profitability statement and work out the pay
back period in respect of each machine. (N)
Machine Damsel Machine Shylock

Estimated life of machine (years)

10

12

Rs.

Rs.

Cost of machine

3,00,000

5,00,000

Cost of indirect materials p.a.

12,000

16,000

Estimated savings in scrap p.a.

20,000

30,000

Additional cost of maintenance p.a.

14,000

22,000

Additional cost of supervision p.a.

24,000

32,000

Employees not required(number)

150

200

Wages per employee p.a.

1,200

1,200

Estimated savings in direct wages

Taxation is to be regarded as 50% of profit (ignore depreciation for calculation of

tax). Which model would you recommend?
18. Calculate discounted payback period from the following information. (E)
Cost of the project = Rs.3,00,000
Life of the project = 5 years
Annual cash inflows = Rs.1,00,000
Year

P.V. factor
@ 10%

0.909

2
0.826

3
0.751

4
0.683

(N)

19. Project X initially costs Rs 25,000.it generates the following cash inflows: (N)
Year Cash inflows Present value of Re.1 at 10%
1

Rs.9,000

0.909

Rs.8,000

0.826

Rs.7,000

0.751

Rs.6,000

0.683

Rs.5,000

0.621

5
0.621

Taking the cut-off as 10%, suggest whether the project should be accepted or not.
20. The Alpha Co. Ltd., is considering the purchase of a new machine. Two alternative
machines (A and B) Have been suggested, each having an initial cost of Rs. 4,00,000
and requiring Rs.20,000 as additional working capital at the end of 1 st year. Earning
after taxation are expected to be as follows: (N)
Year

Cash inflows
Machine A Machine B

40,000

1,20,000

1,20,000

1,60,000

1,60,000

2,00,000

2,40,000

1,20,000

1,60,000

80,000

The company has a target of return on capital of 10% and on this basis, you are
required to compare the profitability of the machines and state which alternatives you
consider financially preferable?
21. A choice is to be made between two competing proposals which require an equal
investment of Rs.50,000 and are expected to generate net cash flows as under: (C)
Project I

Project II

End of year 1 Rs. 25,000 Rs.10,000

End of year 2

15,000

12,000

End of year 3

10,000

18,000

End of year 4

NIL

25,000

End of year 5

12,000

8,000

End of year 6

6,000

4,000

The cost of capital of the company is 10 per cent. The following are the present value
factors at 10% per annum.
Year
P.V. Factor @ 10%

0.909 0.826 0.751 0.683 0.621 0.564

Which project proposal should be chosen and why?

Evaluate the project proposals under:
a) Pay-back period
b) Discounted cash flow method
c) Excess present value index
22. The following are the cash flows and outflows of a certain project. (N)
Year Outflows Inflows
0

1,50,000

30,000

30,000

30,000

50,000

60,000

40,000

The salvage value at the end of 5 years is Rs.40, 000. Taking the cut off rate as 10%, calculate
net present value.
Year
P.V. Factor @ 10%

0.909 0.826 0.751 0.683 0.621

ACCOUNTING RATE OF RETURN

23. Calculate the average rate return for projects. A and B from the following. (N)

Project A
Investments

Project B

Rs.20,000 Rs.30,000

Expected life

4 years

5 years

(No salvage value) Projected Net Income (after interest, depreciation and taxes)
Years Project A Project B
1

2,000

3,000

1,500

3,000

1,500

2,000

1,000

1,000

1,000

6,000

10,000

If the required rate of return is 12%, which project should be undertaken?

24. Excellent Ltd is considering three alternatives items of plant. Estimated cash flows
are: In respect of each project calculate the following and rank them. (C)
a) Payback period

b) Return on investment

Year

20,000

20,000

40,000

6,000

12,000

6,000

14,000

15,000

6,000

14,000

15,000

6,000 (P.a.)

12,000(p.a.)

25. A limited company is considering investing in a project requiring a capital outlay of

Rs.2, 00,000. Forecast of annual income after deprecation but before tax is as follows:
(C)
Year

Rs.

1,00,000

1,00,000

80,000

80,000

40,000

Depreciation may be taken as 20% on original cost and taxation at 50% of net income.
Calculate:
a) Pay-back method
b) Rate of return on original investment
c) Rate of return on average investment
d) Discounted cash flow method taking cost of capital at 10%
e) Excess present value index