1. Firm A has $10,000 in assets entirely financedwith equity. Firm B also has $10,000 in assets, but these assets are financedby $5,000 in debt (with a 10 percent rate of interest) and $5,000 inequity. Both firms sell 10,000 units of output at $2.50 per unit. Thevariable costs of production are $1, and fixed production costs are $12,000. (Toease the calculation, assume no income tax.)a. What is the operating income (EBIT) forboth 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 thepercentage increase in these earnings from the answers you derived in part b.d. Why are the percentage changes different?

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