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FIN 370 Chapter 20 Basic Finance Leverage Problem 1




FIN 370 Chapter 20 Basic Finance Leverage Problem 1;Chapter 20 Basic Finance: Leverage / Problem 1;A) Firm A has $10,000 in assets entirely financed with equity.;B) Firm B also has $10,000 in assets, but these are financed by $5,000 in debt;(with a 10 % rate of interest) and $5,000 in equity.;C) Both firms sell 10,000 units of output at $2.50 per unit.;D) The variable costs of production are $1.00, 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% 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 then compute the percentage increase in these earnings from the answers derived in part b.;d) Why are the percentage changes different?


Paper#77916 | Written in 18-Jul-2015

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