Problem 1 Chapter 20

Problems 1. sign of the zodiac A has $10,000 in assets entirely financed with equity. steadfastly B also has $10,000 in assets, but these assets ar financed by $5,000 in debt (with a 10 percent rate of interest) and $5,000 in equity. both unshakables sell 10,000 units of output at $2.50 per unit. The variable salutes of siding be $1, and fixed production costs atomic number 18 $12,000. (To adroitness the calculation, assume no income value.) a.What is the operating income (EBIT) for both firms? b.What are the mark by and by interest? c.If sales sum up by 10 percent to 11,000 units, by what serving will severally firms lucre after interest annex? To effect the question, determine the earnings after taxes and compute the percentage amplification in these earnings from the answers you derived in part b. d.Why are the percentage changes different? A. Sales Revenue = 10000*2.5=25000 vary cost = 10000*1=10000 immovable cost = 12000 EBIT=25000-10000-1200 0=3000 B. Firm A Firm B Interest=0 Interest= 5000*10%=500 lettuce after tax=3000 cyberspace after tax=2500 C. Sales Revenue = 11000*2.

5=27500 versatile cost = 11000*1=11000 Fixed cost = 12000 EBIT=27500-11000-12000=4500 oFirm A Firm B oInterest=0 Interest= 5000*10%=500 oEarnings after tax=4500 Earnings after tax=4000 o% increase=(4500-3000)/3000*100=50% =(4000-2500)/2500=60% D. The % increases in earnings because taxes are higher(prenominal) for Firm B because of the debt that this form uses for their financing. This results in the lessening of their profits by the interest expense. Because Firm B has a lower earnings after the interest, the aff ects to their net income is a % that is high! er for them.If you want to get a full essay, baffle it on our website: OrderEssay.net

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