Strategic Finance

1.

From the following selected operating data, determine the DOL and comment on which company has the greater amount of business risk and why?

A B

Sales 2500000 3000000

Fixed Cost 750000 1500000

Variable cost 15% of sales 25% of sales

2.

Sales 2000000

Variable cost 1400000

Fixed Cost 400000 (includes 15% interest on 1 million borrowing

i.) Calculate DOL,DFL

ii.) What if sales increase by 100%

DOL = %D EBIT or Sales вЂ" Variable cost

%D Sales Contribution margin

DFL = EBIT

EBIT - Interest

DCL = DOL x DFL

3.

Company A has EBIT of Rs. 2.5 million and its present borrowing are as follows:

14% term loans amounting to 4,000,000

Working Capital Borrowing @16% amounting to 3,300,000

Short term loans @15% amounting to 1,500,000

The sales of the company are growing and to support the extended demand the company proposes to obtain an additional bank loan of Rs. 2.5 million. EBIT is expected to increase by 20%. Calculate interest coverage ratio before and after the borrowing.

4.

Company P Company Q

Sales 500 1000

VC 200 300

Contri. Margin 300 700

FC 150 400

EBIT 150 300

Interest 50 100

EBT 100 200

Calculate DOL, DFL, DCL

Assignment Question

A B C

Financial Leverage 3 4 2

Interest 200 300 1000