# Finance 370- week 5 -chapter 20 - 20024

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FIN370

Finance 370- week five-chapter 20Firm A

Finance 370- week five-chapter 20 Firm A has \$10,000 in assets 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 to 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 incoem 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 percentage will each firms earnings after interest increase? To answer the question, determine the earnings after taxes and compute the percentage increase in these earnings from the answers derived in part b.

d.Why are the percentage changes different?

Solution Description

Sales Revenue = 10000*2.5=25000

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