# Question: Firm A has 10 000 in assets entirely financed with equity

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?

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?

## Relevant Questions

Fill in the table using the following information. Assets required for operation: $2,000 Case A—firm uses only equity financing Case B—firm uses 30% debt with a 10% interest rate and 70% equity Case C—firm uses 50% ...a. Given the following, determine the firm’s optimal capital structure: b. If the firm were using 60 percent debt and 40 percent equity, what would that tell you about the firm’s use of financial leverage? c. What two ...Management of TSC, Inc. is evaluating a new $90,000 investment with the following estimated cash flows: Year Cash Flow 1......... $10,000 2......... 25,000 3......... 40,000 4......... 50,000 If the firm’s cost of ...If the cost of capital is 9 percent and an investment costs $56,000, should you make this investment if the estimated cash flows are $5,000 for years 1 through 3, $10,000 for years 4 through 6, and $15,000 for years 7 ...With sales of $350,000, MJM, Inc. is operating at capacity but management anticipates that sales will grow 25 percent during the coming year. The company earns 10 percent on sales and distributes 50 percent of earnings to ...Post your question