Financial leverage and operating leverage

Financial leverage and operating leverage

The capital structure of the Progressive Corporation consists of ordinary share capital of Rs.10,00,000(shares of Rs.100 each) and Rs.10,00,000 of 10% debentures. The selling price is Rs.10 per unit; variable costs Rs.6 per unit and fixed expenses amt to Rs.2,00,000. The income tax rate is assumed to be 50%. The sales level is expected to increase from 1,00,000 units to 1,20,000 units
Calculate:
1. Percentage increase in earnings per share
2. The degree of financial leverage at 1,00,000 units and 1,20,000 units
3. The degree of operating leverage at 1,00,000 units and 1,20,000 units
4. Comment on the behaviour of operating and financial leverages in relation to increase in production from 1,00,000 units to 1,20,000 units

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