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Fm Practice Qouestions
Business Risk, Financial Risk and Leverage 1. The data relating to two companies are as given below: Company A Company B Equity Capital Rs 600,000 Rs 3,50,000 12% Debentures Rs 4,00,000 Rs 6,50,000 Output (units) per annum 60,000 15,000 Selling price/unit Rs 30 Rs 250 Fixed Costs per annum Rs 7,00,000 Rs 14,00,000 Variable Cost per unit Rs 10 Rs 75 You are required to calculate the Operating leverage, financial leverage and Combined leverage of these two companies.
Ans : Company A Company B Operating Leverage 2.4 2.14 Financial Leverage 1.11 1.07 Combined Leverage 2.66 2.29 2. You are analyzing the beta for ABC Computers Ltd and have divided the Company into four broad business groups, with market values and betas for each group. Business group Market value of equity Unleveraged beta Main frames Rs 100 billion 1.10 Personal Computers Rs 100 billion 1.50 Software Rs 50 billion 2.00 Printers Rs 150 billion 1.00 ABC Computers Ltd had Rs 50 billion in debt outstanding. Required: (i) Estimate the beta for ABC Computers Ltd as a company. Is this beta going to be equal to the beta estimated by regressing past returns on ABC Computers stock against a market index. Why or why not? (ii) If the Treasury bond’s rate is 7.5%, estimate the cost of equity for ABC Computers Ltd Estimate the cost of equity for each division. Which cost of equity would you use to value the printer division? The average market risk premium is 8.5%. (IPCC, Nov. 2004) Ans: (i) Beta = 1.275; Beta calculations will not be the same; (ii) ainframe
16.85%, Personal Computers 20.25%, Software 24.5%. Printers 16% To value printer division 16% rate is recommended.

3. The following summarizes the percentage changes in operating income, revenues, and betas for four pharmaceutical firms. Firm Change in revenue Change in
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