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1,00,000 1.26 Number of Equity Shares 1,00,000 EPS 0.70 % increase in EPS = 1.26 -0.70 = 0.56 0.56 ... 0.70 x 100 = 80 % Operating leverage = Contribution EBIT 4,00,000 2,00,000 4,80,000 2,80,000 = 2 Times = 1.71 Times 2,80,000 1,80,000 Financial leverage = EBIT EBT 2,00,000 1,00,000 = 2 Times 1.56 = Times Comments: On account of increase in sales from 1 lakh units to 1,20,000 units, the EPS has increased by 80%. While the operating leverage has come down from 2 times to 1.71 times and financial leverage has also declined from 2 times to 1.56 times. There is a significant decrease in both the business risk and the financial risk of the company on account of reduction in both the leverages. 26 Illustration 7: A firm has sales of Rs. 75 lakhs, variable cost of Rs. 42 lakhs and Fixed cost of Rs. 6 lakhs. It has a debt of Rs. 45 lakhs @ 9% and equity of Rs. 55 lakhs. (i) What is the firms's ROI? (ii) Does it have favourable financial leverage? (iii) If the firm belongs to an industry whose asset turnover is 3, does it have a high or low asset leverage? (iv) What are the operating, financial and combined leverages of the firm? (v) If the sales drop of Rs. 50 lakhs, what will be the EBIT? (vi) At what level of EBT of the firm will be equal to zero

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