XYZ Ltd. has an average selling price of Rs 10 per unit; its variable unit costs are Rs. 5 perunit; fixed costs amount to Rs. 1,70,000. It finances all its assets by equity funds. It pays 35 percenttax on its income. ABC Ltd. is identical to XYZ Ltd. except in the pattern of financing. The latterfinances its assets 50 percent by equity and 50 percent'by debt, the interest on which amounts to Rs20,000.Determine the degree of operating, financial and combined leverage at Rs. 7,00,000 sales for boththe firms, and interpret the results.

Given information : Particulars XYZ ABC Sales 7000000 7000000 Selling price 10 10 Variable…

Answered: fixed costs amount to Rs. 1,7 n its…

Business

Finance

fixed costs amount to Rs. 1,7 n its income. ABC Ltd. is id ces its assets 50 percent by e 0.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Question

XYZ Ltd. has an average selling price of Rs 10 per unit; its variable unit costs are Rs. 5 per
unit; fixed costs amount to Rs. 1,70,000. It finances all its assets by equity funds. It pays 35 percent
tax on its income. ABC Ltd. is identical to XYZ Ltd. except in the pattern of financing. The latter
finances its assets 50 percent by equity and 50 percent'by debt, the interest on which amounts to Rs
20,000.
Determine the degree of operating, financial and combined leverage at Rs. 7,00,000 sales for both
the firms, and interpret the results.

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