Firm A has $9,000 in assets entirely financed with equity. Firm B also has $9,000 in assets, but these assets are financed by $4,500 in debt (with a 15 percent rate of interest) and $4,500 in equity. Both firms sell 13,000 units of output at $2.50 per unit. The variable costs of production are $1, and fixed production costs are $14,000. (To ease the calculation, assume no income tax.) What is the operating income (EBIT) for both firms? Round your answers to the nearest dollar. Firm A: $ Firm B: $ What are the earnings after interest? Round your answers to the nearest dollar. Firm A: $ Firm B: $ If sales increase by 10 percent to 14,300 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. Round your answers to one decimal place. Firm A: % Firm B: % Why are the percentage changes different? The answers differ because Firm A uses while Firm B uses . The successful use of magnifies the percentage increase in earnings when sales expand.
Firm A has $9,000 in assets entirely financed with equity. Firm B also has $9,000 in assets, but these assets are financed by $4,500 in debt (with a 15 percent rate of interest) and $4,500 in equity. Both firms sell 13,000 units of output at $2.50 per unit. The variable costs of production are $1, and fixed production costs are $14,000. (To ease the calculation, assume no income tax.)
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What is the operating income (EBIT) for both firms? Round your answers to the nearest dollar.
Firm A: $
Firm B: $
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What are the earnings after interest? Round your answers to the nearest dollar.
Firm A: $
Firm B: $
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If sales increase by 10 percent to 14,300 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. Round your answers to one decimal place.
Firm A: %
Firm B: %
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Why are the percentage changes different?
The answers differ because Firm A uses while Firm B uses . The successful use of magnifies the percentage increase in earnings when sales expand.
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