Financing Decisions - Leverages

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. 30 original test MCQs, 2 marks each. Practice and separate-test stems differ. T001-T010 use one shared case below; T011-T030 stand alone.

Original practice, not official ICAI questions or suggested answers. Scores are temporary and not synced to Study Hub. Contract/current-rule/accounting/tax boundaries are included in the review pack.

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Meridian Tools: shared case for T001-T010

Shared case: Meridian Tools, T001-T010 Meridian makes and sells 100,000 units at Rs 100 per unit. Variable cost is Rs 60 per unit. Annual operating fixed cost is Rs 25 lakh, annual interest Rs 5 lakh and annual preference dividend Rs 1.5 lakh. Corporate tax is 25%; coupon interest deductible and preference dividend nondeductible as case assumptions. Ordinary shares are 5 lakh. All annual financial totals are Rs lakh and earnings divided by lakh shares gives Rs per share. Price, variable cost per unit, fixed cost, interest, preference, tax regime and ordinary shares stay unchanged in the requested volume scenarios; no capacity step-cost occurs. EBT remains positive at the requested 10% decline. No principal schedule, working-capital/capex cash flow or current-law assurance is supplied. Operating BEP sets EBIT to zero; financial BEP sets ordinary earnings/EPS to zero, not all dated cash payments. Use contribution=Q*(price-variable cost), EBIT=contribution-fixed operating cost, ordinary earnings=(EBIT-interest)*(1-tax)-preference dividend. DOL=contribution/EBIT; DFL=EBIT/[EBIT-interest-preference/(1-tax)]; DCL=their product at a nonzero compatible base. Each of the first10 questions is independently scored and does not require a preceding answer.

Plan comparison	Value / stated unit
Case tax rate, percent	25
Base EBIT, Rs lakh	15

FM-C06-T001 · 2 marks

Read shared case

At the shared-case base, contribution?

A. 60 lakh variable cost. B. 100 lakh sales. C. 40 lakh. D. 15 lakh EBIT.

FM-C06-T002 · 2 marks

Read shared case

At base, operating EBIT?

A. 10 lakh EBT. B. 40 lakh contribution. C. 7.5 lakh PAT. D. 15 lakh.

FM-C06-T003 · 2 marks

Read shared case

At base, ordinary EPS?

A. Rs 1.20. B. Rs 1.50 ignoring preference. C. Rs 3.00 ignoring financing. D. Rs 2.00 pretax.

FM-C06-T004 · 2 marks

Read shared case

At base, DOL?

A. 5 combined. B. .375. C. 2.6667. D. 1.875 DFL.

FM-C06-T005 · 2 marks

Read shared case

At base, ordinary-EPS DFL?

A. 1.5 omits preference. B. 2.6667 DOL. C. 1.875. D. 1.7647 not tax-adjusting dividend.

FM-C06-T006 · 2 marks

Read shared case

At base, DCL?

A. 4.5417 sum of ratios. B. 1.875 financial only. C. 4 ignoring preference. D. 5.

FM-C06-T007 · 2 marks

Read shared case

Operating break-even sales?

A. 25 lakh fixed cost only. B. 62.5 lakh. C. 100 lakh base sales. D. 80 lakh financial threshold.

FM-C06-T008 · 2 marks

Read shared case

Sales at zero ordinary EPS?

A. 75 lakh excludes preference. B. 80 lakh. C. 62.5 lakh operating threshold. D. 31.5 lakh sums without margin.

FM-C06-T009 · 2 marks

Read shared case

After 10% volume decline, EBIT?

A. 36 lakh contribution. B. 11 lakh. C. 13.5 lakh assuming proportional EBIT. D. 6 lakh EBT.

FM-C06-T010 · 2 marks

Read shared case

After 10% volume decline, ordinary EPS and percent change?

A. Rs 1.80, wrong direction. B. Rs.90, omits preference. C. Rs.60, a 50% fall. D. Rs 1.08, a 10%fall.

FM-C06-T011 · 2 marks

No debt but volatile unit demand and high operating fixed costs. Which conclusion is safe?

A. Debt absence guarantees stable EBIT. B. All risk is zero. C. DOL must equal zero. D. Business risk can remain high despite no fixed-finance magnification.

FM-C06-T012 · 2 marks

Sales volume changes 12%, EPS changes 30%, compatible nonzero bases. DCL?

A. 3.6. B. 2.5. C. 18. D. .4.

FM-C06-T013 · 2 marks

At 10000 units, Manual C 3/fixed 1 lakh; Auto C 5/fixed 3 lakh. DOL comparison?

A. Auto always creates higher value. B. Both 1 due to equal EBIT. C. Manual 3, Auto 5. D. Manual 1.5, Auto 2.5 though EBIT 2 each.

FM-C06-T014 · 2 marks

Volume moves from operating break-even to profitable level. Why not compute ordinary base % EBIT change?

A. DOL must be 1. B. EBIT must remain zero. C. The zero EBIT denominator makes it undefined. D. Divide by new EBIT to preserve original base.

FM-C06-T015 · 2 marks

EBIT moves from-.8 to-.48 lakh with 10% volume rise. What is correct?

A. Loss narrows .32 lakh despite algebraic EBIT percent change-40%. B. Rupee loss worsens 40%. C. Percent change must be+40% regardless of base. D. EBIT is positive.

FM-C06-T016 · 2 marks

Unit contribution 40 rupees, fixed 3 lakh, volume 20000. DOL?

A. 2 at 15000. B. .625. C. 1.6. D. 4 at 10000.

FM-C06-T017 · 2 marks

Only selling price rises; unit quantity/variable unit cost unchanged. Base contribution/EBIT DOL can be used blindly on sales revenue %?

A. Yes for any revenue source. B. No; price-driven revenue has a different cost response. C. All variable cost must rise with price. D. Only if no debt, always.

FM-C06-T018 · 2 marks

Interest 4, preference 3 lakh, tax 25%. Pre-tax-equivalent total fixed financing charge?

A. 6.25 lakh. B. 4 lakh. C. 8 lakh. D. 7 lakh.

FM-C06-T019 · 2 marks

Interest 4, preference 1.5 lakh, tax 25%, EBIT 6. DFL?

A. Undefined at zero ordinary earnings. B. 0. C. 6. D. 1.

FM-C06-T020 · 2 marks

EBIT 3, interest 4 lakh, shares 2 lakh; negative EBT taxed 0 with no refund. EPS?

A. Rs-.375 with invented immediate shield. B. Rs 0.00. C. Rs.50. D. Rs-.50.

FM-C06-T021 · 2 marks

EBIT improves from-2 to-1.8, interest 3 lakh/no tax, 5 lakhshares. Algebraic EPS %change?

A. -4%; EPS moves-1 to-.96 rupee. B. +4% with altered denominator. C. -10%. D. +10%.

FM-C06-T022 · 2 marks

Contribution 50, EBIT 20, interest 4, preference 3 lakh, tax 25%. DCL?

A. 1.6667 financial only. B. 2.5 operating only. C. 3.125 ignoring preference. D. 4.1667.

FM-C06-T023 · 2 marks

MOSfraction.20, DCL 10. DFL?

A. 2. B. 5 DOL. C. .5. D. 50.

FM-C06-T024 · 2 marks

DFL 2, interest 3 lakh, DOL 5, no preference. Operating fixed cost?

A. 6 lakhEBIT. B. 30 lakh contribution. C. 24 lakh. D. 3 lakh interest.

FM-C06-T025 · 2 marks

DOL 1.33/DFL 1.50 rounded. ReportedDCL 2.00. What is supported?

A. Create a new interest liability. B. DCL must be 1.33+1.50. C. Proved exact inconsistency. D. Rounded product 1.995 rounds 2.00; not evidence of a clash by itself.

FM-C06-T026 · 2 marks

Capital 100, equity 60, debt 40 at 10%, EBIT 8 lakh, tax 25%. Debt-plan ROE versus all-equity?

A. Guaranteed higher market value. B. 5% versus 6%, unfavourable on stipulated return comparison. C. 8% versus 10%. D. 6% versus 5%.

FM-C06-T027 · 2 marks

Capital 100, debt 40 at 10%, equity 60, EBIT 10 lakh, tax 25%. Compared with all-equity 100, ROE?

A. Both 7.5%, conditional neutral. B. Both 10%. C. Debt always superior despite same return. D. Debt 10%, equity 7.5%.

FM-C06-T028 · 2 marks

A page labels PAT/equity funds as ROI but acknowledges it is ROE. Best presentation?

A. Name the ratio ROE and state numerator/denominator rather than silently equate it to EBIT/total capital. B. Ignore tax and capital basis. C. Both ratios identical in every structure. D. Use any denominator to fit label.

FM-C06-T029 · 2 marks

A 25%volume decline wipes out positive base EPS under stable linear regime. DCL?

A. 100. B. 4. C. 25. D. .25.

FM-C06-T030 · 2 marks

Which claim is not supported solely by a low-DOL/high-DFL combination?

A. Principal schedules matter. B. Demand uncertainty matters. C. It balances different sensitivity components. D. It is universally best for every firm and guarantees payment capacity.