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FFM Assignment

The document outlines an assignment for the Department of Public Policy and Governance focusing on financial concepts such as operating leverage, financial leverage, and combined leverage, including their calculations and relationships with risk. It presents practical scenarios involving PTK Ltd., PQR Ltd., and XYZ Ltd. where students must analyze different financing plans and their effects on Earnings Per Share (EPS) under various conditions. The assignment requires a detailed understanding of leverage types and their implications for corporate finance decisions.

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60 views2 pages

FFM Assignment

The document outlines an assignment for the Department of Public Policy and Governance focusing on financial concepts such as operating leverage, financial leverage, and combined leverage, including their calculations and relationships with risk. It presents practical scenarios involving PTK Ltd., PQR Ltd., and XYZ Ltd. where students must analyze different financing plans and their effects on Earnings Per Share (EPS) under various conditions. The assignment requires a detailed understanding of leverage types and their implications for corporate finance decisions.

Uploaded by

priya.hr23
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Department of Public Policy and Governance

BK School of Professional and Management Studies


Gujarat University

FFM Assignment - Unit 2

1) Distinguish between operating leverage and financial leverage. How are they measured?

2) What do you mean by Operating Leverage? How is it calculated? Explain its relationship
with operating risk.

3) What do you mean by Financial Leverage? How is it calculated? Explain its relationship
with financial risk.

4) What is combined leverage? How is it calculated?

5) Define leverage? What are the types of Leverages? Explain.

6) PTK Ltd. has a share capital of 5,00,000 divided into shares of 10 each. It has a major
expansion programme requiring an investment of 2,00,000. The management is
considering the following alternative for raising ₹2,00,000:
(i) Issue of 20,000, Equity shares of ₹ 10 each.
(ii) Issue of 20,000, 12% Preference shares of ₹ 10 each.
(iii) Issue of 10% Debentures of ₹2,00,000.
The company's present Earnings Before Interest and Taxes (EBIT) are ₹ 1,00,000 per
annum subject to tax @ 30%. You are required to calculate the effect of each of the above
financial plans on the firm's Earnings Per Share (EPS) assuming that
(A) EBIT continues to be the same even after the expansion.
(B) EBIT increases by 50,000 after the expansion.

7) EBIT of PQR Ltd. is ₹4,00,000 p.a. on an investment of₹ 10,00,000. The company can
finance this amount of Rs. 10,00,000 by issuing equity share capital of 100 each, 10%
preference shares and 15% debentures. Suppose, Company analyzes the following four
plans to raise the required funds of ₹ 10,00,000:
Plan I: By issuing equity share capital at par.
Plan II: 50% funds by equity share and 50% funds by Preference share capital.
Plan III: 50% funds by equity share capital, 25% by issue of 10% preference shares and
25% by issue of 15% debentures.
Plan IV: 25% funds by equity share capital, 25% by issue of 10% preference shares and
50% by issue of 15% debentures. rate of 40%, Advise the
Find and analyse EPS under different plans assuming tax company as to which plan
should be accepted if the company wants to maximise its EPS

8) XYZ Ltd. has a share capital of ₹20,00,000 divided into shares of ₹100 each. For major
expansion plan it requires an additional investment of ₹10,00,000. Following alternative
financial plans are being considered by the management
Plan I: Issue of 10,000 equity shares of ₹100 each.
Plan II: Issue of 10,000, 10% preference shares of ₹100 each.
Plan III: Issue of 10% debentures of ₹ 10,00,000.
Calculate the effect of each of the above mode of financing on EPS presuming that
Company's current EBIT is ₹ 8,00,000 p.a. The company is in tax bracket of 30%
(a) EBIT continues to be the same even after expansion.
(b) EBIT increases by ₹2,00,000 after expansion.
Which financial plan should be accepted by the company?

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