financial question help - 22241

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Request Description

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 percentage

 

will each firm’s earnings after interest increase? To answer the question,

 

determine the earnings after taxes and compute the percentage

 

increase in these earnings from the answers you derived in part b

 

d. Why are the percentage changes different?

 

Solution Description
  1. 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,
    a
Attachments
EBIT-FIRMA and FIRMB(1).doc
EBIT-FIRMA and ...