Question;Firm A has $20,000;in assets entirely financed with equity.;Firm B also has $20,000 in assets, financed by $10,000 in;debt (with a 10 percent rate of interest) and $10,000 in equity.;Both firms sell 30,000 units at a sale price of $4.00 per;unit.;The variable costs of production are $3 per unit.;Fixed production costs are $25,000.;(assume no income tax.);a. What is the operating income for both firms (i.e. what is;the income after deducting operating expenses, but before deducting expenses;for interest or taxes)?;b. What are the earnings after interest for each firm?;c. What is each firm?s Return on Equity? (calculate ROE;based on earnings after interest ? assume no income tax);For parts (d) ? (e) assume sales increase by 10% (to 33,000;units);d. What are the earnings after interest for each firm with;the increased sales?;e. With the increased sales, what is the percentage increase;in earnings after interest for each firm?;f. Which firm had the higher increase in earnings, and why?;g. What is each firm?s Return on Equity with the increased;sales?;h. Why might investors prefer to invest in the firm that;provides lower total earnings?
Paper#49669 | Written in 18-Jul-2015Price : $22