eBookProblem 20-01Firm A has $9,100 in assets entirely financed with equity. Firm B also has $9,100 in assets, but these assets are financed by $4,550 in debt (with a 12 percent rate of interest) and $4,550 in equity. Both firms sell 15,000 units of output at $2.20 per unit. The variable costs of production are $1, and fixed production costs are $13,000. (To ease the calculation, assume no income tax.)What is the operating income (EBIT) for both firms? Round your answers to the nearest dollar.Firm A: $ Firm B: $ What are the earnings after interest? Round your answers to the nearest dollar.Firm A: $ Firm B: $ If sales increase by 10 percent to 16,500 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: %Why are the percentage changes different?The answers differ because Firm A uses while Firm B uses . The successful use of magnifies the percentage increase in earnings when sales expand.

EBIT Means Earnings before interest and Taxes 1) FIRM A FIRM B Sales 33,000…

Firm A has $9,100 in assets entirely financed with equity. Firm B also has $9,100 in assets, but these assets are financed by $4,550 in debt (with a 12 percent rate of interest) and $4,550 in equity. Both firms sell 15,000 units of output at $2.20 per unit. The variable costs of production are $1, and fixed production costs are $13,000. (To ease the calculation, assume no income tax.)

Firm A has $9,100 in assets entirely financed with equity. Firm B also has $9,100 in assets, but these assets are financed by $4,550 in debt (with a 12 percent rate of interest) and $4,550 in equity. Both firms sell 15,000 units of output at $2.20 per unit. The variable costs of production are $1, and fixed production costs are $13,000. (To ease the calculation, assume no income tax.)

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter16: Financial Planning And Control

Section: Chapter Questions

Problem 19PROB

See similar textbooks

Similar questions

Firm A has $9,000 in assets entirely financed with equity. Firm B also has $9,000 in assets, but these assets are financed by $4,500 in debt (with a 15 percent rate of interest) and $4,500 in equity. Both firms sell 13,000 units of output at $2.50 per unit. The variable costs of production are $1, and fixed production costs are $14,000. (To ease the calculation, assume no income tax.) What is the operating income (EBIT) for both firms? Round your answers to the nearest dollar. Firm A: $ Firm B: $ What are the earnings after interest? Round your answers to the nearest dollar. Firm A: $ Firm B: $ If sales increase by 10 percent to 14,300 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: % Why are the percentage changes different? The…
Davis Co. sells watches for $115 apiece. The variable cost per watch is $89. Davis has fixed operating costs of $12,000 and fixed financing (interest) costs of $48,000. On average, Davis sells 10,000 units. What is Davis's degree of financial leverage (DFL)? A. 124% B. 220%C. 130% D. 105%
Q5. Beck Inc. and Bryant Inc. have the following operating data: Beck Inc. Bryant Inc. Sales $330,700 $1,056,000 Variable costs (132,700) (633,600) Contribution margin $198,000 $422,400 Fixed costs (132,000) (246,400) Operating income $66,000 $176,000 a. Compute the operating leverage for Beck Inc. and Bryant Inc. If required, round to one decimal place. Beck Inc. Bryant Inc. b. How much would operating income increase for each company if the sales of each increased by 20%? If required, round answers to nearest whole number. Dollars Percentage Beck Inc. $ % Bryant Inc. $ % c. The difference in the _________ of operating income is due to the difference in the operating leverages. Beck Inc.'s __________ operating leverage means that its fixed costs are a __________ percentage of contribution margin than are Bryant Inc.'s.
Ausel's Cabinets has $27,600 in net fixed assets and is operating at 96 percent of capacity. Sales are $36,200 currently. What is the required increase in fixed assets if sales are projected to increase by 14 percent? Multiple Choice$2,605 $6,833 $4,205 $3,400, $0
The following data are available for X Company:• Ave Selling price of 16 per unit• Variable cost per unit of 11• Units sold is 200,000• Fixed cost is 800,000• Interest expense is 50,000What is the DFL (Degree of Financial Leverage)? • 2.50 times • 2.33 times • 5 times • 1.33 times
A firm sells 500,000 widgets at $40 each, the cost of the widgets is $25 each, expected general and administrative expenses are 20% of sales, the firm has $2,000,000 of debt at a rate of 5%, and taxes are 35%. Calculate the firm's earnings after taxes? O $1,560,000 O $1,750,000 O $2,210,000 O $2,100,000
Tropp Corporation sells a product for $10 per unit. The fixed expenses are $420,000 per month and the unit variable expenses are 60% of the selling price. What sales would be necessary in order for Tropp to realize a profit of 10% of sales? a. b. C. d. $1,050,000 $945,000 $1,400,000 $840,000
Gandi Mfg., Inc., is currently operating at only 80% fixed asset capacity. Current sales are $610,000. How fast sales can grow before any new fixed asset are needed? а. 30% b. 40% c. 25% d. 15%
:04 Variable expenses for Alpha Corporation are 40% of sales. What are sales at the break-even point, assuming that fixed expenses total $150,000 per year: Multiple Choice O $250,000 $600,000 $375,000 $150,000
4 Atlas Company has a monthly target operating income of $20,000. Variable expenses are 60% of sales and monthly fixed expenses are $11,400. What is ?John's operating leverage factor at the targetlevel of operating income 1.75 ) 1.57 () 1.43 ) 2.00 () 1.35 ()
XYZ Co. has a contribution margin of $450,000 and profit of $150,000. If sales increase 10%, by how much will profits increase ? а . 15% b. 90% C. None of the given answer is correct. d. 30% e. 60%
Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows: $ 7,500,000 3,750,000 2,050,000 $ 1,700,000 700,000 1,000,000 $ 350,000 $ 650,000 450,000 1.44 Sales Variable costs (50% of sales) Fixed costs Earnings before interest and taxes (EBIT) Interest (10% cost) Earnings before taxes (EBT) Tax (35%) Earnings after taxes (EAT) Shares of common stock Earnings per share The company is currently financed with 50% percent debt and 50% percent equity (common stock, par value of $10). In order to expand the facilities, Mr. Delsing estimates a need for $4.5 million in additional financing. His investment banker has laid out three plans for him to consider: 1. Sell $4.5 million of debt at 9 percent. 2. Sell $4.5 million of common stock at $15 per share. 3. Sell $2.25 million of debt at 8 percent and $2.25 million of common stock at $20 per share. Variable costs are expected to stay at 50 percent of sales, while fixed expenses will…