FIN/370 Week 5 Individual Problem Assignment 1. Firm A has$10000 in assets entir

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FIN/370 Week 5 Individual Problem Assignment 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. Bothfirms sell 10000 units of output at $2.50 per unit. The variablecosts of production are $1 and fixed production costs are $12000.(To ease the calculation assume no income tax.) a. What is theoperating income (EBIT) for both firms? b. What are the earningsafter interest? c. If sales increase by 10 percent to 11000 unitsby what percentage will each firms earnings after interestincrease? To answer the question determine the earnings aftertaxes and compute the percentage increase in these earnings fromthe answers you derived in part b. d. Why are the percentagechanges different?

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