Firm A has $9,500 in assets entirely financed with equity. Firm B also has $9,500 in assets, but these assets are financed by $4,750 in debt (with a 20 percent rate of interest) and $4,750 in equity. Both firms sell 12,000 units of output at $2.40 per unit. The variable costs of production are $1, and fixed production costs are $14,000. (To ease the calculation, assume no income tax.) a. What is the operating income (EBIT) for both firms? Round your answers to the nearest dollar. Firm A: $ Firm B: $ b. What are the earnings after interest? Round your answers to the nearest dollar, Firm A: $ Firm B: $ c. If sales increase by 10 percent to 13,200 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 earnings from the answers you derived in part b. Round your answers to one decimal place. Firm A: Firm B: d. Why are the percentage changes different? The answers differ b % % these
Firm A has $9,500 in assets entirely financed with equity. Firm B also has $9,500 in assets, but these assets are financed by $4,750 in debt (with a 20 percent rate of interest) and $4,750 in equity. Both firms sell 12,000 units of output at $2.40 per unit. The variable costs of production are $1, and fixed production costs are $14,000. (To ease the calculation, assume no income tax.) a. What is the operating income (EBIT) for both firms? Round your answers to the nearest dollar. Firm A: $ Firm B: $ b. What are the earnings after interest? Round your answers to the nearest dollar, Firm A: $ Firm B: $ c. If sales increase by 10 percent to 13,200 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 earnings from the answers you derived in part b. Round your answers to one decimal place. Firm A: Firm B: d. Why are the percentage changes different? The answers differ b % % these
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Firm A has $9,500 in assets entirely financed with equity. Firm B also has $9,500 in assets, but these assets are financed by $4,750 in debt (with a 20 percent rate of interest) and $4,750 in equity. Both firms sell 12,000 units of
output at $2.40 per unit. The variable costs of production are $1, and fixed production costs are $14,000. (To ease the calculation, assume no income tax.)
a. What is the operating income (EBIT) for both firms? Round your answers to the nearest dollar.
Firm A: $
Firm B: $
b. What are the earnings after interest? Round your answers to the nearest dollar.
Firm A: $
Firm B: $
c. If sales increase by 10 percent to 13,200 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:
d. Why are the percentage changes different?
The answers differ because Firm A uses -Select-
%
while Firm B uses -Select-
V The successful use of -Select-
magnifies the percentage increase
earnings when sales expand.
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