[Solution]FIN370 ch-20 week 5 Problem 1

Assistance/HelpCHAPTER 20 Leverage 397Problems 1. Firm A has $10,000 in assets entirely financed with equity. Firm B alsohas $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 productionare $1, and fixed production costs are $12,000. (To ease the calculation,assume no income tax.)

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