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Question: XYZ Ltd is a leading manufacturer of decorative and industrial paints in India. The income statement
(Exhibit 1) and the balance sheet (Exhibit 2) for the current year are given.
Its sales next year are estimated to be 25 per cent higher on account of increase in demand for paints from the housing and commercial real estate sectors. The variable costs as percentage to sale are likely to remain constant. An increase of 12.5 per cent is estimated in fixed costs.
XYZ Ltd is planning to launch two new brands of luxury emulsions-Supercoat and Luxurycoat. The Supercoat paint would generate an additional Rs 600 crore sales and require an extra Rs. 400 crore investment involving installation of manufacturing and packaging machinery.
While the additional fixed costs requirement would be Rs 150 crore, variable cost to sales ratio would not change. For manufacturing the Luxurycoat paint the additional investment requirement and sales generated would amount to Rs 600 crore and Rs 800 crore respectively. The variable cost ratio would remain constant but the fixed cost are expected to increase by Rs 240 crore. The XYZ Ltd has four alternative financing plans to choose from (Exhibit 3). Its current debt-equity ration is 5:1.
XYZ Ltd has hired Amar as a financial consultant to carry out the following tasks:
(1) What would its operating,
financial and total leverages be next year without the new proposal?
(2) Assuming that the XYZ Ltd finances the projects using financing plan (A), determine the three leverages for the two projects individually. Which new brand is better?
(3) Which financing option should XYZ Ltd choose to if only Supercoat is to be manufactured?
(4) Calculate the financial breakeven points of each plan.
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