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The following information is available for Navkar and Co. : EBIT Rs 20,20,000 ; Profit before...

The following information is available for Navkar and Co. : EBIT Rs 20,20,000 ; Profit before tax Rs 13,20,000 ; Fixed costs Rs 7,00,000. The percentage change in EPS is ................, if the sales are expected to increase by 5%. a) 16.02% b) 24.87% c) 25.50% d) 10.25%

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Answer #1

Combined Leverage = % change in EPS/%change in sales

Combined leverage = (Contribution/EBIT)*(EBIT/EBT)

Contribution = EBIT + Fixed Cost = 20,20,000 + 7,00,000 = 27,20,000

EBIT = 20,20,000

EBT or Profit Before Tax = 13,20,000

Combined Leverage = (27,20,000/20,20,000)*(20,20,000/13,20,000) = 2.6061

Therefore %change in EPS/%change in Sales = 2.6061

given % change in sales = 5%

%change in EPS / 5% =2.6061

Therefore % change in EPS = 0.05*2.6061 = 0.130305 or 13.0305%

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