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Firm A has $10,000 in assets entirely financed with equity




Question;1. Firm A has;$10,000 in assets entirely financed with equity. Firm B also has $10,000 in;assets, but these assets are financed by $5,000 in debt (with a 10 percent rate;of interest) and $5,000 in equity. Both firms sell 10,000 units of output at;$2.50 per unit. The variable costs of production;are $1, and fixed production costs are $12,000. (To ease the calculation, assume;no income tax.);a. What is the operating income (EBIT) for both firms?;b. What are the;earnings after interest?;c. If sales;increase by 10 percent to 11,000 units, by what percentage will each firm?s;earnings after interest increase? To answer the question, determine the;earnings after taxes and compute the percentage increase in these earnings from;the answers you derived in part b.;d. Why are the;percentage changes different?


Paper#45244 | Written in 18-Jul-2015

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