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,
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?
Write a Review
Leave a reply Cancel reply
Ask Your Question
We have verified professionals who are ready to answer your question.
Save Time and Money
We choose experts who can quickly answer your question and that suit your budget.
Get Your Answer
Your satisfaction is 100% guaranteed. You can keep on asking questions until you get the answer you need.