Company has sales of Rs 500000, variable cost Rs 300000. Fixed cost Rs 100000 and long term loans Rs 400000 at 10% interest. Calculate financial leverage.Options :2.331.671.13.5
Question
Company has sales of Rs 500000, variable cost Rs 300000. Fixed cost Rs 100000 and long term loans Rs 400000 at 10% interest. Calculate financial leverage.Options :2.331.671.13.5
Solution
To calculate the financial leverage, we need to use the formula:
Financial Leverage = Total Assets / Equity
First, let's calculate the Total Assets:
Total Assets = Sales - Variable Cost Total Assets = Rs 500000 - Rs 300000 Total Assets = Rs 200000
Next, let's calculate the Equity:
Equity = Total Assets - Long Term Loans Equity = Rs 200000 - Rs 400000 Equity = -Rs 200000
Now, let's calculate the Financial Leverage:
Financial Leverage = Total Assets / Equity Financial Leverage = Rs 200000 / -Rs 200000 Financial Leverage = -1
Therefore, the financial leverage is -1.
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