Chapter 20 Problem 1

Week 5 Financing Strategy conundrum Problem 1 Chapter 20 libertine A has $10,000 in assets entirely financed with equity. Firm B also has $10,000 in assets, but these assets argon financed by $5,000 in debt (with a 10 portion rate of following) and $5,000 in equity. Both firms fail 10,000 units of output at $2. 50 per unit. The variable apostrophizes of occupation are $1, and fixed production costs are $12,000. (To ease the calculation, assume no income tax. ) A. What if the operating income (EBIT) for both firms? Sales/Revenue 10000 * 2. 50 = 25000 unsettled price 10000 * 1 = 10000 Fixed issue Cost 12000EBIT = sales/revenue variable cost fixed production cost = 25000 10000 12000 = $3000 B. What are the remuneration later interest? Interest bread after interest Firm A 0 3000 0 = $3000 Firm B5000 * 10% = 500 3000 500 = $2500 C. If sales increase by 10 percent to 11,000 units, by what percentage will each firms earnings after interest increase? To answer the questio n, determine the earnings after taxes and compute the percentage increase in these earnings from the answers you derived in get b. Sales/Revenue 11000 * 2. 50 = 27500 Variable Cost 11000 * 1 = 11000Fixed Production Cost 12000 EBIT = sales/revenue variable cost fixed production cost = 27500 11000 12000 = 4500 Firm A Firm B Interest 05000 * 10% = 500 Earnings after interest (prior) 3000 0 = 3000 3000 500 = 2500 Earnings after interest (after) 4500 0 = 4500 4500 500 = 4000 Increase/decrease % 50% 60% D. Why are the percentage changes different? Firm B had a high increase in profit because they had a higher net % change and lowered their interest income through their debt financing.