# FIN 370 Solution - 19840

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## studentlance

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Firm A has \$10,000 in assets entirely financed with equity
Firm A has \$10,000 in assets entirely financed with equity. Firm B alsohas \$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 sell10,000 units of output at \$2.50 per unit. The variable costs of productionare \$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? To answer the question,determine the earnings after taxes and compute the percentageincrease in these earnings from the answers you derived in part b.d. Why are the percentage changes different?

Solution Description

What is the operating income (EBIT) for both firms?

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