Firm A has $10,000 in assets entirely financed with equity. Firm B also has $10,

Question

Firm A has $10,000 in assets entirely financed with equity. 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. 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% to 11,000 units, by what percentages will each firm's earning after interest increase? To answer the question, determine the earnings after taxws and compute the percentage increase in these earnings from the answers you derived in part B.

D.) Why are the percentage changes different?

I hope that someone can help me with this. Please show all your work and explain in detail. I want to understand this. Thank you.

Explanation / Answer

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 if the operating income (EBIT) for both firms?
Sales/Revenue: 10000 * 2.50 = 25000
Variable Cost: 10000 * 1 = 10000
Fixed Production Cost: 12000

EBIT = sales/revenue

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