Response to the following problem:
(a) The following figures relate to two companies:
|
P Ltd |
Q Ltd |
| Sales |
500 |
1,000 |
| Variable costs |
200 |
300 |
| Contribution |
300 |
700 |
| Fixed costs |
150 |
400 |
| EBIT |
150 |
300 |
| Interest |
50 |
100 |
| Profit before tax |
100 |
200 |
You are required to: (i) calculate the operating, financial and combined leverage for the two companies; and (ii) comment on the relative risk position of the firms.
(b) (i) Find out operating leverage from the following data:
Sales, $ 50,000
Variable costs, 60 per cent
Fixed costs, $ 12,000
(ii) Find the financial leverage from the following data:
Net worth, $ 25,00,000
Debt/Equity, 3:1
Interest rate, 12 per cent
Operating profit, $ 20,00,000