Financing Decisions - Leverages

Original descriptive practice: 30 saved, 2 at 3 marks, 22 at 5 and 6 at 10. Business/financial risk, DOL/DFL/DCL, operating/financial break-even, MOS, preference and loss-tax effects, inverse reconstruction, technology and price/step-cost comparisons, ROI versus ROE and cash limits. Original practice, not ICAI questions or official marking schemes. Native tables scroll on phones. Original preparation is not a live or complete official question bank.

Boundaries: Volume sensitivity requires stable prices, unit variable costs, fixed costs, financing, shares and the stated tax regime. Zero and negative bases require explicit interpretation. The official broad DFL range claim needs a scope boundary for negative EBIT; qualitative risk combinations do not prove a universal best choice. ROI and ROE are explicitly distinguished. Tax assumptions are exercise facts, not current-law conclusions.

FM-C06-D001 · 5 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. A firm sells cyclical products and proposes fixed interest borrowing. Required: distinguish business, financial and combined risk; explain why having no debt does not remove uncertainty. (5 marks)

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Marks	Credit	Working / case application
1	Business	Demand, selling price, input costs and operating fixed costs affect uncertain EBIT.
1	Financial	Fixed financing claims magnify the residual ordinary shareholder income response.
1	Operating measure	DOL relates sales-volume change to EBIT under stable costs/prices.
1	Financial measure	DFL relates EBIT change to ordinary EPS under stable financing/tax/share assumptions.
1	Limits	No debt may mean DFL=1, not zero business risk. DCL combines sensitivities, not a probability of default.

Original indicative capped allocation, not official marking. Equivalent correct work credited without duplication. State bases, relevant range and tax assumptions; leverage is sensitivity, not a cash-solvency certificate or financing instruction.

Official concept source, PDF page 2

FM-C06-D002 · 3 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. Sales volume grows 8%, EBIT grows 24%, EPS grows 36%, all measured against the same positive base. Required: calculate DOL, DFL and DCL from changes. (3 marks)

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Marks	Credit	Working / case application
1	DOL	24/8=3.
1	DFL	36/24=1.5.
1	DCL	36/8=4.5=3 x 1.5; same base and regime required.

Official concept source, PDF page 3

FM-C06-D003 · 5 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. Sales 100 lakh, variable cost 60 lakh, operating fixed cost 25 lakh. Required: contribution, EBIT, DOL, P/V ratio and sales break-even. Stable linear volume model. (5 marks)

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Marks	Credit	Working / case application
1	Contribution	100-60=40 lakh.
1	EBIT	40-25=15 lakh.
1	DOL	40/15=2.666667.
1	P/V	40/100=40%.
1	BEP	25/.4=62.5 lakh sales; not a principal-service threshold.

Official concept source, PDF page 6

FM-C06-D004 · 5 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. Output 12,000 units, price Rs 100, variable cost Rs 60, fixed operating cost Rs 3 lakh. Required: contribution, EBIT, DOL, BEP units and volume margin of safety. (5 marks)

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Marks	Credit	Working / case application
1	Contribution	12,000 x 40=4.8 lakh.
1	EBIT	4.8-3=1.8 lakh.
1	DOL	4.8/1.8=2.666667.
1	BEP	300,000/40=7,500 units.
1	MOS	(12,000-7,500)/12,000=37.5%; inverse of DOL as a fraction.

Official concept source, PDF page 6

FM-C06-D005 · 5 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. Sales 80 lakh, contribution margin 35%, operating fixed cost 21 lakh. Required: contribution/EBIT, break-even sales, MOS fraction/percent, inverse-MOS DOL and effect of 5% volume increase at unchanged unit terms. (5 marks)

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Marks	Credit	Working / case application
1	Income	C 28, EBIT 7 lakh.
1	BEP	21/.35=60 lakh.
1	MOS	(80-60)/80=.25=25%.
1	DOL	1/.25=4, not 1/25=.04.
1	Change	EBIT increases 4 x 5%=20% to 8.4 lakh; direct C=29.4 less 21.

Official concept source, PDF page 8

FM-C06-D006 · 10 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. Two technologies at 10,000 units and price Rs 100: Manual variable cost Rs 70/fixed cost Rs 1 lakh; Automated variable cost Rs 50/fixed cost Rs 3 lakh. At 8,000/10,000/12,000 units compare EBIT; at 10,000 compare DOL, BEP and cost indifference. No investment price or cash finance supplied. (10 marks)

Units and Rs per unit where stated; financial totals in Rs lakh unless expressly stated otherwise.

Technology	Variable Rs/unit	Fixed Rs lakh	Base units
Manual	70	1	10000
Automated	50	3	10000

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Marks	Credit	Working / case application
1	Manual base	C 3 lakh, EBIT 2 lakh.
1	Auto base	C 5 lakh, EBIT 2 lakh.
1	Manual DOL	3/2=1.5.
1	Auto DOL	5/2=2.5.
1	At 8000	Manual EBIT 2.4-1=1.4; auto 4-3=1 lakh.
1	At 12000	Manual 3.6-1=2.6; auto 6-3=3 lakh.
1	Manual BEP	100,000/30=3,333.333 units; whole-unit operating BEP 3,334.
1	Auto BEP	300,000/50=6,000 units.
1	Indifference	30 Q-100,000=50 Q-300,000 gives Q=10,000; 2 lakh EBIT each.
1	Decision limit	Automated magnifies upside/downside at this base. Demand probabilities, capex, cash timing and risk/value required before selection.

Official concept source, PDF page 12

FM-C06-D007 · 5 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. No operating fixed cost, price Rs 100, variable cost Rs 60; compare 10,000 and 12,000 units. Required: EBIT, percentage changes, DOL and explain the phrase no operating leverage. (5 marks)

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Marks	Credit	Working / case application
1	Base	EBIT=contribution=4 lakh.
1	New	EBIT=4.8 lakh.
1	Changes	Volume and EBIT both increase 20%.
1	DOL	1 at positive base, not zero.
1	Meaning	No fixed-cost magnification is called no operating leverage; ratio 1 does not mean no demand/business uncertainty.

Official concept source, PDF page 9

FM-C06-D008 · 5 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. Price Rs 100, variable Rs 60, operating fixed cost Rs 4 lakh. Required: BEP units, EBIT at 10,000, DOL at that base and EBIT at 11,000, explaining why a base percentage-change calculation fails. (5 marks)

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Marks	Credit	Working / case application
1	BEP	400,000/40=10,000 units.
1	Base EBIT	4-4=0 lakh.
1	DOL	Contribution/zero is undefined; do not write a finite measured ratio.
1	New EBIT	11,000 x 40-400,000=40,000 rupees=.4 lakh.
1	Percentage limit	Cannot divide EBIT change by zero base. Limits grow unbounded near BEP; calculate levels directly.

Official concept source, PDF page 10

FM-C06-D009 · 5 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. Volume 8,000, price Rs 100, variable Rs 60, fixed cost Rs 4 lakh. Increase volume 10% at unchanged terms. Required: EBIT/DOL before, EBIT after, algebraic percentage change and interpretation. (5 marks)

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Marks	Credit	Working / case application
1	Base	C 3.2 lakh; EBIT -.8 lakh.
1	DOL	3.2/-.8=-4.
1	After	8,800 x 40=3.52 lakh; EBIT -.48 lakh.
1	Percentage	(-.48-(-.8))/(-.8)=-40%=DOL x 10%.
1	Meaning	Rupee loss narrows by .32 lakh. Negative base flips percentage sign; negative DOL is not proof rising volume worsens rupee profit.

Official concept source, PDF page 11

FM-C06-D010 · 5 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. Price Rs 100, variable Rs 60, fixed cost Rs 3 lakh. At volumes 10,000/15,000/20,000 calculate EBIT and DOL. Explain why one coefficient is not constant at every base. (5 marks)

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Marks	Credit	Working / case application
1	10000	C 4, EBIT 1 lakh, DOL 4.
1	15000	C 6, EBIT 3 lakh, DOL 2.
1	20000	C 8, EBIT 5 lakh, DOL 1.6.
1	Formula	DOL=Q x 40/(Q x 40-300,000), evaluated at each base.
1	Interpretation	Farther above BEP lowers sensitivity with other facts fixed; near-BEP and negative-base cases need careful interpretation.

Official concept source, PDF page 11

FM-C06-D011 · 5 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. Base output 10,000, price Rs 100, variable Rs 60, operating fixed Rs 3 lakh. Compare (a) 10% more units at unchanged prices/costs, (b) 10% higher price at unchanged units/cost per unit. Required: EBIT changes and validity of applying base DOL to revenue changes. (5 marks)

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Marks	Credit	Working / case application
1	Base	C 4 lakh, EBIT 1 lakh, DOL 4.
1	Volume case	11,000 x 40-300,000=1.4 lakh EBIT.
1	Volume percent	Sales and EBIT rise 10% and 40%; base DOL applies.
1	Price case	10,000 x (110-60)-300,000=2 lakh; EBIT rises 100% though revenue rises 10%.
1	Scope	Revenue price change does not scale variable cost with volume. Do not apply volume DOL blindly to price/mix shifts.

Official concept source, PDF page 5

FM-C06-D012 · 5 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. Base sales 100 lakh, variable cost 60%, fixed cost 25 lakh. A proposed 20% volume expansion triggers fixed cost 35 lakh instead of 25. Required: base DOL, naive forecast, actual new EBIT and reason for difference. (5 marks)

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Marks	Credit	Working / case application
1	Base	Contribution 40, EBIT 15, DOL 8/3.
1	Naive	20% x 8/3=53.3333% increase; EBIT 23 lakh.
1	Actual	Sales 120; contribution 48; new fixed 35; EBIT 13 lakh.
1	Change	(13-15)/15=-13.3333%.
1	Cause	Step-fixed costs violate unchanged fixed-cost range. Direct scenario computation required; naive leverage not a general forecast.

Official concept source, PDF page 6

FM-C06-D013 · 5 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. EBIT 18 lakh, interest 6 lakh, tax 25%, 4 lakh ordinary shares, no preference. Required: PAT/EPS, DFL, effect of 10% EBIT increase and direct reconciliation, with a limit. (5 marks)

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Marks	Credit	Working / case application
1	PAT EPS	EBT 12; PAT 9 lakh; EPS Rs 2.25.
1	DFL	18/12=1.5.
1	Forecast	10% EBIT rise gives 15% EPS rise to Rs 2.5875.
1	Direct	EBIT 19.8, EBT 13.8, PAT 10.35, EPS 2.5875.
1	Scope	Stable interest/tax/shares, positive EBT assumed; principal payments and working capital are absent.

Official concept source, PDF page 14

FM-C06-D014 · 10 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. EBIT 20 lakh, interest 4, preference dividend 3, tax 25%, ordinary shares 5 lakh. All income points positive EBT; preference nondeductible. Compute PAT, ordinary earnings/EPS, DFL, financial BEP, and direct EPS after 10% EBIT rise; explain the ordinary EBT denominator error. (10 marks)

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Marks	Credit	Working / case application
1	EBT PAT	16; PAT 12 lakh.
1	Ordinary earnings	12-3=9 lakh.
1	EPS	9/5=Rs 1.8.
1	Pre-tax equivalent	Preference 3/.75=4 lakh.
1	DFL denominator	20-4-4=12 lakh.
1	DFL	20/12=1.666667; also 20 x .75/9.
1	Financial BEP	4+3/.75=8 lakh EBIT.
1	New EPS	At EBIT 22: PAT 13.5, ordinary 10.5, EPS 2.1.
1	Percent	(2.1-1.8)/1.8=16.6667%=DFL x 10%.
1	Error limit	EBIT/EBT=20/16=1.25 ignores preference; not the ordinary-EPS sensitivity. Neither BEP nor EPS proves cash solvency.

Official concept source, PDF page 15

FM-C06-D015 · 3 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. No interest or preference, tax 30%, 10 lakh shares. EBIT increases from 10 to 12 lakh. Compute EPS at both points and DFL. (3 marks)

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Marks	Credit	Working / case application
1	EPS base	10 x .7/10=Rs .70.
1	EPS new	12 x .7/10=Rs .84; 20% increase.
1	DFL	20%/20%=1 under stable positive tax regime; no fixed-finance magnification, not zero risk.

Official concept source, PDF page 15

FM-C06-D016 · 5 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. Interest 4 lakh, preference 1.5 lakh, tax 25%, 10 lakh shares. Required: financial BEP, EPS at EBIT 6 and 7, DFL at each and limitation. (5 marks)

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Marks	Credit	Working / case application
1	BEP	4+1.5/.75=6 lakh.
1	EPS at 6	[(6-4)x .75-1.5]/10=0.
1	DFL at 6	6/(6-4-2) undefined; no finite percentage sensitivity at zero EPS.
1	At 7	Ordinary .75 lakh, EPS .075, DFL=7/(7-6)=7.
1	Limit	Fixed ordinary-earning break-even, not full cash debt-service capacity; compute levels at zero base.

Official concept source, PDF page 19

FM-C06-D017 · 5 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. EBIT 3 lakh, interest 4 lakh, 2 lakh shares, no preference. Case expressly assumes immediate full 25% tax refund on negative EBT. Increase EBIT to 3.3 lakh. Required: EPS/DFL, new EPS/percentage and interpretation; do not generalise tax treatment. (5 marks)

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Marks	Credit	Working / case application
1	Base	EBT -1, refund .25, earnings -.75 lakh; EPS -.375.
1	DFL	3/(3-4)=-3.
1	After	EBT -.7, earnings -.525, EPS -.2625.
1	Percent	Change .1125/-.375=-30%=DFL x 10%; rupee loss narrows.
1	Tax scope	Full immediate loss refund is explicit model-only. Without usable relief, recompute earnings and sensitivities; no current-law inference.

Official concept source, PDF page 16

FM-C06-D018 · 5 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. A firm has EBIT -2 lakh, interest 3 lakh, 5 lakh shares and no preference. Ignore tax entirely. Required: EPS, algebraic DFL, direct result of EBIT changing to -1.8 and assess the official broad claim that DFL cannot lie between 0 and 1. (5 marks)

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Marks	Credit	Working / case application
1	EPS	(-2-3)/5=-1 rupee.
1	DFL	-2/(-5)=.4, between zero and one.
1	New	(-1.8-3)/5=-.96; rupee loss narrows .04.
1	Percentage	EBIT change .2/-2=-10%; EPS change .04/-1=-4%; ratio .4.
1	Source scope	Page 18 broad range statement does not cover this negative-EBIT extension as written. Preserve scope caveat, not assert universal rule or official erratum.

Official concept source, PDF page 18

FM-C06-D019 · 5 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. EBIT 2 lakh, interest 4, tax 25% only on positive EBT with no immediate refund on losses, 2 lakh shares. Evaluate base EPS and direct EPS at EBIT 3 and 5; assess constant tax formula across boundary. (5 marks)

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Marks	Credit	Working / case application
1	Base	EBT -2, tax 0; EPS -1.
1	At 3	EBT -1, tax 0; EPS -.5.
1	At 5	EBT 1, tax .25; EPS .375.
1	Local below boundary	With tax 0 and no preference DFL=2/(2-4)=-1 for small changes remaining in loss region.
1	Boundary	A single fixed .75 earnings multiplier gives wrong negative EPS. Tax boundary crossing requires piecewise direct calculations, not one global linear forecast.

Official concept source, PDF page 15

FM-C06-D020 · 10 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. Sales 120 lakh, variable cost 60%, operating fixed cost 30, interest 6, tax 25%, 3 lakh shares/no preference. Stable volume model. Compute income/EPS, all three leverages, EBIT and EPS after +/-10% volume changes and financial break-even sales. (10 marks)

Units and Rs per unit where stated; financial totals in Rs lakh unless expressly stated otherwise.

Item	Rs lakh / stated unit
Sales	120
Variable cost percent	60
Operating fixed	30
Interest	6
Tax percent	25
Shares lakh	3

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Marks	Credit	Working / case application
1	Base C EBIT	C 48; EBIT 18 lakh.
1	Base EPS	EBT 12; PAT 9; EPS 3.
1	DOL	48/18=8/3.
1	DFL	18/12=1.5.
1	DCL	4=48/12.
1	Up EBIT	Sales 132 C 52.8; EBIT 22.8, rise 26.6667%.
1	Up EPS	EBT 16.8 PAT 12.6 EPS 4.2, rise 40%.
1	Down EBIT	Sales 108 C 43.2 EBIT 13.2, fall 26.6667%.
1	Down EPS	EBT 7.2 PAT 5.4 EPS 1.8, fall 40%.
1	Financial sales threshold	(30+6)/.4=90 lakh; EPS zero, not principal/investment solvency.

Official concept source, PDF page 20

FM-C06-D021 · 5 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. Sales 100 lakh, variable ratio 50%, fixed cost 30, interest 4, preference 3, tax 25%, 5 lakh shares. Calculate DOL/DFL/DCL, EPS, financial break-even sales and effect of 6% volume rise under unchanged terms. (5 marks)

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Marks	Credit	Working / case application
1	Base	C 50 EBIT 20; ordinary[(20-4)x .75-3]=9; EPS 1.8.
1	DOL	50/20=2.5.
1	DFL DCL	20/(20-4-3/.75)=5/3; DCL 25/6=4.166667.
1	Financial sales	(30+4+4)/.5=76 lakh.
1	Growth	EPS rises 25% to 2.25; sales 106 C 53 EBIT 23, PAT 14.25 ordinary 11.25 /5=2.25.

Official concept source, PDF page 20

FM-C06-D022 · 5 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. DFL 2, DOL 3, annual interest 4 lakh, contribution margin 40%, no preference. Required: EBIT, contribution, fixed operating cost, sales and DCL. All ratios exact. (5 marks)

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Marks	Credit	Working / case application
1	EBIT	2=E/(E-4), E 8 lakh.
1	Contribution	3 x 8=24 lakh.
1	Fixed	24-8=16 lakh.
1	Sales	24/.4=60 lakh.
1	DCL	3 x 2=6; reconstructed positive income base required.

Official concept source, PDF page 24

FM-C06-D023 · 10 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. MOS fraction .20, DCL 10, interest 3 lakh, contribution margin 30%, tax 25%, shares 2 lakh/no preference. Reconstruct DOL/DFL/income/sales/fixed/BEP/EPS and forecast EPS after 5% volume decline. (10 marks)

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Marks	Credit	Working / case application
1	DOL	1/.20=5.
1	DFL	10/5=2.
1	EBIT	2=E/(E-3) gives E 6 lakh.
1	Contribution	5 x 6=30 lakh.
1	Sales	30/.3=100 lakh.
1	Fixed	30-6=24 lakh.
1	BEP	24/.3=80 lakh, MOS 20% matches.
1	EPS	EBT 3 PAT 2.25 /2=1.125.
1	Forecast	DCL 10 x(-5%)=-50%; EPS .5625.
1	Direct	Sales 95 C 28.5 EBIT 4.5 EBT 1.5 PAT 1.125 /2=.5625; unchanged regime.

Official concept source, PDF page 24

FM-C06-D024 · 5 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. Supplied EBIT 10 lakh, coupon interest 3 lakh, no preference or other fixed financing charge, but asserted exact DFL 2. Required: calculate formula DFL, interest implied by DFL, gap and handling without inventing a liability. (5 marks)

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Marks	Credit	Working / case application
1	Formula	10/(10-3)=1.428571, not 2.
1	Implied	2=10/(10-I) gives I 5 lakh.
1	Gap	5-3=2 lakh unexplained.
1	No fiction	Case expressly says no other charge; do not label the gap an actual other-interest liability.
1	Handle	Flag incompatible givens; ask which is authoritative or present clearly labelled branches. Rounded values need tolerance, not arbitrary balancing.

Official concept source, PDF page 23

FM-C06-D025 · 5 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. Printed DOL 1.33 and DFL 1.50, both rounded to nearest .01; reported DCL 2.00. Required: rounded product, interval product bounds and whether discrepancy proves inconsistency. (5 marks)

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Marks	Credit	Working / case application
1	Product	1.33 x 1.50=1.995; rounds 2.00.
1	DOL interval	Underlying approximately[1.325, 1.335).
1	DFL interval	Underlying approximately[1.495, 1.505).
1	Product range	About[1.980875, 2.009175), so 2.00 fits.
1	Interpretation	No contradiction established solely by rounded product. Use underlying income figures when available, carry precision until final rounding.

Official concept source, PDF page 23

FM-C06-D026 · 10 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. Assets/book invested capital 100 lakh. Compare all-equity 100 with debt 40 at 10% and equity 60. No preference; tax 25%; define pre-tax ROI=EBIT/100 and ROE=PAT/equity. For EBIT 8/10/15 compute PAT/ROE in both, classify effect and explain double-edged financing and metric labels. (10 marks)

Units and Rs per unit where stated; financial totals in Rs lakh unless expressly stated otherwise.

EBIT lakh	Capital lakh	Debt lakh	Kd	Tax
8	100	40	10%	25%
10	100	40	10%	25%
15	100	40	10%	25%

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Marks	Credit	Working / case application
1	Interest	Debt plan 4 lakh annually.
1	At 8 all-equity	PAT 6, ROE 6%.
1	At 8 debt	PAT 3, ROE 5%; ROI 8% below 10% cost, unfavourable.
1	At 10 all-equity	PAT 7.5, ROE 7.5%.
1	At 10 debt	PAT 4.5, ROE 7.5%; neutral with ROI 10%.
1	At 15 all-equity	PAT 11.25, ROE 11.25%.
1	At 15 debt	PAT 8.25, ROE 13.75%; ROI 15% exceeds 10%, favourable.
1	Double edge	Fixed interest remains when operations weaken; debt magnifies residual equity returns.
1	Metric boundary	ROI here pre-tax EBIT/total capital, ROE after-tax PAT/equity; do not substitute one denominator silently. Official page 22 expressly uses an ROE calculation under ROI label.
1	Decision limit	Favourable ROE is not automatically wealth/value or cash solvency; principal/covenants/market risk omitted.

Official concept source, PDF page 18

FM-C06-D027 · 5 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. Firm A DOL 2/DFL 3, Firm B DOL 3/DFL 2, both positive compatible bases. Required: compare DCL and 5% volume-drop EPS responses; assess a universal claim that low operating/high financial leverage is always best. (5 marks)

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Marks	Credit	Working / case application
1	DCL A	2 x 3=6.
1	DCL B	3 x 2=6.
1	Response	Each EPS falls 30% for 5% volume fall under its unchanged linear regime.
1	Different components	A greater fixed-finance sensitivity, B greater operating sensitivity; same product not identical risk distributions.
1	No universal best	Page 20 qualitative combination table is not sufficient for a universal recommendation. Demand volatility, cash terms, value and preferences matter.

Official concept source, PDF page 20

FM-C06-D028 · 5 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. A firm has sales 100 lakh, no preference, DOL 2 and fixed financing under positive linear tax regime. A 25% volume decline makes ordinary EPS zero. Required: infer DCL/DFL, base EBIT if interest 4 lakh, contribution/fixed operating cost and financial sales threshold. (5 marks)

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Marks	Credit	Working / case application
1	DCL	-100%/-25%=4.
1	DFL	4/2=2.
1	EBIT	2=E/(E-4), E 8 lakh.
1	Operating costs	C 16, fixed 8, contribution margin 16%.
1	Threshold	(8+4)/.16=75 lakh sales; EPS zero. Does not mean all principal obligations are met.

Official concept source, PDF page 45

FM-C06-D029 · 5 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. Sales 100 lakh, variable 60%, fixed 25 including depreciation 5, interest 5, tax 25%, shares 2 lakh. Principal 8 and net capex/workingcapital 7 due in period, no other cash adjustments. Required: leverages, EPS, cash proxy and gap. (5 marks)

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Marks	Credit	Working / case application
1	Leverages	C 40 EBIT 15; DOL 8/3, DFL 15/10=1.5, DCL 4.
1	EPS	PAT(15-5)x .75=7.5 lakh; EPS 3.75.
1	Cash proxy	PAT 7.5+depreciation 5=12.5 before principal/investment.
1	Gap	12.5-8-7=-2.5 lakh.
1	Limit	Positive earnings and interest coverage do not settle principal/investment cash needs; dates/actual conversion still matter.

Official concept source, PDF page 21

FM-C06-D030 · 10 marks

Financial amounts are Rs lakh and ordinary share counts are lakh shares unless another unit is specified. Meridian Tools sells 100,000 units at Rs 100, variable cost Rs 60, fixed operating cost 25 lakh, interest 5 lakh, preference 1.5 lakh, tax 25%, 5 lakh ordinary shares. Stable volume/price/cost/financing, positive EBT for requested scenarios. Preference nondeductible. Calculate base income/EPS/all leverages, operating/financial BEP sales and EPS after 10% volume fall; explain sensitivity and cash limits. (10 marks)

Units and Rs per unit where stated; financial totals in Rs lakh unless expressly stated otherwise.

Item	Rs lakh / stated unit
Quantity units	100000
Price Rs/unit	100
Variable Rs/unit	60
Fixed operating	25
Interest	5
Preference	1.5
Tax percent	25
Ordinary shares lakh	5

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Marks	Credit	Working / case application
1	Base contribution	Sales 100 lakh variable 60 C 40.
1	EBIT	40-25=15 lakh.
1	Ordinary EPS	EBT 10 PAT 7.5 ordinary 6 /5=1.2.
1	DOL	40/15=8/3.
1	DFL	15/(15-5-1.5/.75)=15/8=1.875.
1	DCL	5=40/8.
1	Operating BEP	25/.4=62.5 lakh sales, 62,500 units.
1	Financial BEP	(25+5+2)/.4=80 lakh sales, 80,000 units; ordinary EPS zero.
1	Down case	Sales 90 C 36 EBIT 11 EBT 6 PAT 4.5 ordinary 3 /5=.6; EPS falls 50%, EBIT falls 26.6667%.
1	Limits	Tax/shares/costs fixed within relevant range. Negative/zero bases, step costs or tax changes need direct levels. No principal schedule/cash conversion supplied, so no full solvency conclusion.

Official concept source, PDF page 20