Finance-project for Waqas

Individual

Financing Strategy

Problems

Prepare

a response to Problem 1 in Ch. 20 of

Basic Finance

.

Question:

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?

Individual

Financing Strategy

Problems

Prepare a response to Problem 1 in Ch. 20 of Basic Finance.

Question: 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?