Firm A has $20,000 in assets entirely financed with equity.
Firm B also has $20,000 in assets, financed by $10,000 in debt (with a 10 percent rate of interest) and $10,000 in equity.
Both firms sell 30,000 units at a sale price of $4.00 per unit.
The variable costs of production are $3 per unit.
Fixed production costs are $25,000.
(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 33,000 units, by what percentage
will each firm’s earnings after interest increase? To answer the question,
determine the earnings after interest and compute the percentage
increase in these earnings from the answers you derived in part b.
d. Why are the percentage changes different?
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