FIN 370 Chapter 20 Basic Finance Leverage Problem 1

FIN 370 Chapter 20 Basic Finance  Leverage  Problem 1

20 Basic Finance:  Leverage / Problem 1

1. A)   Firm A has $10,000 in assets entirely financed with equity. 
2. B)  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.

1. C)  Both firms sell 10,000 units of output at $2.50 per unit.
2.  D)  The variable costs of production are $1.00, and fixed production costs are

        12,000. (To ease the calculation, assume no income tax.)