Solution for QID #35384: The capital structure of XYZ Ltd. consist of an ordinary sha | StudyHelpMe

The capital structure of XYZ Ltd. consist of an ordinary share capital of Rs.10, 00,000/- (shares of Rs.100 par value) and Rs.10,00,000/- of 10% . The company is considering to increase production by 20% from 1,00,000 units to 1,20,000 units, the selling price is Rs.10/- per unit, variable cost is Rs.6/- per unit and total fixed cost is Rs.2,00,000/- .Tax rate applicable is 35%. Calculate (i) % increase in EPS, (ii) DOL at 1,00,000 and 1,20,000 units, (iii) DFL at 1,00,000 and 1,20,000 units (iv) comment on the behavior of operating and financial leverage in relation to increase in the level of production. What do you advice the company? Justify your answer.