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Finance problem




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.);What is the operating;income (EBIT) for both firms?;What are the earnings;after interest for each firm?;What is each firm?s Return;on Equity? (calculate ROE based on earnings after interest ? assume no;income tax);What are the earnings;after interest for each firm with the increased sales?;With;the increased sales, what is the percentage increase in earnings after interest;for each firm?;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?;="#000000">


Paper#49799 | Written in 18-Jul-2015

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