Problem 20-01 Firm A has $9,600 in assets entirely financed with equity. Firm B also has $9,600 in assets, but these assets are financed by $4,800 in debt (with a 15 percent rate of interest) and $4,800 in equity. Both firms sell 10,000 units of output at $2.70 per unit. The variable costs of production are $1, and fixed production costs are $10,000. (To ease the calculation, assume no income tax.) a. What is the operating income (EBIT) for both firms? Round your answers to the nearest dollar. Firm A: $ Firm B: $ b. What are the earnings after interest? Round your answers to the nearest dollar. Firm A: $ Firm B: $ c. If sales increase by 20 percent to 12,000 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. Round your answers to one decimal place. Firm A: Firm B: d. Why are the percentage changes different? .. The successful use of -Select- The answers differ because Firm A uses -Select- while Firm Buses -Select- magnifies the percentage increase in earnings when sales expand.
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