Finance-project for Waqas

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?

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?