1. 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?

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