Chapter 20 Problem 1

Week 5 – Financing Strategy Problem Problem 1 – Chapter 20 Firm A has $10,000 in effects entirely financed succeeding a while equity. Firm B also has $10,000 in effects, but these effects are financed by $5,000 in default (succeeding a while a 10 percent reprove of curiosity-behalf) and $5,000 in equity. Twain firms dispose-of 10,000 items of output at $2. 50 per item. The wavering requires of genesis are $1, and urban genesis requires are $12,000. (To refreshment the consideration, wear no pay tax. ) A. What if the untrammelled pay (EBIT) for twain firms? Sales/Revenue: 10000 * 2. 50 = 25000 Wavering Cost: 10000 * 1 = 10000 Urban Genesis Cost: 12000 EBIT = sales/revenue – wavering require – urban genesis require = 25000 – 10000 – 12000 = $3000 B. What are the hues succeeding curiosity-behalf? InterestEarnings succeeding curiosity-behalf Firm A: 0 3000 – 0 = $3000 Firm B:5000 * 10% = 500 3000 – 500 = $2500 C. If sales incrrefreshment by 10 percent to 11,000 items, by what percentage conciliate each firm’s hues succeeding curiosity-behalf acception? To vindication the topic, state the hues succeeding taxes and value the percentage incrrefreshment in these hues from the vindications you conservative in multiply b. Sales/Revenue: 11000 * 2. 50 = 27500 Wavering Cost: 11000 * 1 = 11000 Fixed Genesis Cost: 12000 EBIT = sales/revenue – wavering require – urban genesis require = 27500 – 11000 – 12000 = 4500 Firm A Firm B Curiosity-behalf 05000 * 10% = 500 Hues succeeding curiosity-behalf (prior) 3000 – 0 = 3000 3000 – 500 = 2500 Hues succeeding curiosity-behalf (after) 4500 – 0 = 4500 4500 – 500 = 4000 Increase/decrrefreshment % 50% 60% D. Why are the percentage substitutes irrelative? Firm B had a excellent incrrefreshment in advantage consequently they had a excellent net % substitute and lowered their curiosity-behalf pay through their default financing.