In this paperwork of FIN 370 Version 7 Week 5 Financing Strategy Problems you will find the answers on the next points:
1. Firm A has $10000 in assets entirely financed with equity. Firm B also has $10000 in assets but these assets are financed by $5000 in debt (with a 10 percent rate of interest) and $5000 in equity. Both firms sell 10000 units of output at $2.50 per unit. The variable costs of production are $1 and fixed production costs are $12000. (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 11000 units by what percentage will each firm