# CU 2021 Solved paper| BBA Hons| Financial Management Solved question paper of Calcutta University

1. Relevant information about three companies are given below:

Calculate Operating Leverage, Financial Leverage, Combined Leverage and EPS of these three companies and comment.

SOLUTION:

To calculate the operating leverage, financial leverage, combined leverage, and earnings per share (EPS) of the three companies, we’ll use the following formulas:

Operating Leverage (OL) = Contribution Margin / Operating Profit

Financial Leverage (FL) = EBIT / Profit before Tax (PBT)

Combined Leverage (CL) = OL * FL

Earnings per Share (EPS) = (Profit after Tax – Preference Dividend) / Number of Equity Shares

Let’s calculate these values for each company:

For BIL (Company B): Contribution Margin = Unit Selling Price – Unit Variable Cost = Rs. 40 – Rs. 15 = Rs. 25

Operating Profit = Capacity Utilization and Sales * Contribution Margin = 75% * 1,00,000 * Rs. 25 = Rs. 18,75,000

OL = Contribution Margin / Operating Profit = Rs. 25 / Rs. 18,75,000 ≈ 0.0013

EBIT = Operating Profit – Fixed Cost = Rs. 18,75,000 – Rs. 2,00,000 = Rs. 16,75,000

PBT = EBIT – Interest = Rs. 16,75,000 – Rs. 1,00,000 = Rs. 15,75,000

FL = EBIT / PBT = Rs. 16,75,000 / Rs. 15,75,000 ≈ 1.0635

CL = OL * FL ≈ 0.0013 * 1.0635 ≈ 0.0014

EPS = (Profit after Tax – Preference Dividend) / Number of Equity Shares Profit after Tax = PBT – Tax = Rs. 15,75,000 – (0.3 * Rs. 15,75,000) = Rs. 11,02,500 EPS = (Rs. 11,02,500 – 0) / 1000 = Rs. 11.02

For PIL (Company P): Contribution Margin = Unit Selling Price – Unit Variable Cost = Rs. 50 – Rs. 15 = Rs. 35

Operating Profit = Capacity Utilization and Sales * Contribution Margin = 75% * 1,50,000 * Rs. 35 = Rs. 39,37,500

OL = Contribution Margin / Operating Profit = Rs. 35 / Rs. 39,37,500 ≈ 0.0009

EBIT = Operating Profit – Fixed Cost = Rs. 39,37,500 – Rs. 3,00,000 = Rs. 36,37,500

PBT = EBIT – Interest = Rs. 36,37,500 – Rs. 2,00,000 = Rs. 34,37,500

FL = EBIT / PBT = Rs. 36,37,500 / Rs. 34,37,500 ≈ 1.0588

CL = OL * FL ≈ 0.0009 * 1.0588 ≈ 0.001

EPS = (Profit after Tax – Preference Dividend) / Number of Equity Shares Profit after Tax = PBT – Tax = Rs. 34,37,500 – (0.3 * Rs. 34,37,500) = Rs. 24,06,250 EPS = (Rs. 24,06,250 – Rs. 50,000) / 1000 = Rs. 23.56

For MIL (Company M): Contribution Margin = Unit Selling Price – Unit Variable Cost = Rs. 50 – Rs. 20 = Rs. 30

Operating Profit = Capacity Utilization and Sales * Contribution Margin = 75% * 2,50,000 * Rs. 30 = Rs. 56,25,000

OL = Contribution Margin / Operating Profit = Rs. 30 / Rs. 56,25,000 ≈ 0.0005

EBIT = Operating Profit – Fixed Cost = Rs. 56,25,000 – Rs. 5,00,000 = Rs. 51,25,000

PBT = EBIT – Interest = Rs. 51,25,000 – Rs. 3,00,000 = Rs. 48,25,000

FL = EBIT / PBT = Rs. 51,25,000 / Rs. 48,25,000 ≈ 1.0615

CL = OL * FL ≈ 0.0005 * 1.0615 ≈ 0.0005

EPS = (Profit after Tax – Preference Dividend) / Number of Equity Shares Profit after Tax = PBT – Tax = Rs. 48,25,000 – (0.3 * Rs. 48,25,000) = Rs. 33,77,500 EPS = (Rs. 33,77,500 – Rs. 1,00,000) / 1000 = Rs. 32.77