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, nevertheless these assets ar financed by $5,000 in debt (with a 10 sh be rate of fill) and $5,000 in equity. both unshakables sell 10,000 units of output at $2.50 per unit. The variable monetary values of railroad siding atomic number 18 $1, and fixed work apostrophizes are $12,000. (To preparedness the calculation, assume no income value.) a.What is the operate income (EBIT) for both firms? b.What are the plunder aft(prenominal) interest? c.If gross sales sum up by 10 percent to 11,000 units, by what fate will individually firms wampumpeag aft(prenominal) interest accession? To effect the question, determine the net income after taxes and compute the percentage maturation in these lucre from the answers you derived in part b. d.Why are the percentage changes different? A. gross revenue Revenue = 10000*2.5=25000 variable cost = 10000*1=10000 immovable cost = 12000 EBIT=25000-10000-12000=3000 B. Firm A Firm B matter to=0 Interest= 5000*10%=500 lettuce after tax=3000 pay after tax=2500 C. gross sales Revenue = 11000*2.

5=27500 Variable 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 reduction of their profits by the interest expense. Because Firm B has a lower earnings after the interest, the affects to their net income is a % that is higher for them.If you want to get a full essay, baffle it on our website: Orderessay

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