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




Question;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 percentagewill each firm?s earnings after interest increase?;d. Why are the percentage changes different?


Paper#50810 | Written in 18-Jul-2015

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