Firm A has $10,800 in assets entirely financed with equity. Firm B also has $10,800 in assets, but these assets are financed by $5,400 in debt (with a 12 percent rate of interest) and $5,400 in equity. Both firms sell 12,000 units of output at $2.70 per unit. The variable costs of production are $1, and fixed production costs are $13,000. (To ease the calculation, assume no income tax.)

1. What is the operating income (EBIT) for both firms? Round your answers to the nearest dollar.

   Firm A: $

   Firm B: $

2. What are the earnings after interest? Round your answers to the nearest dollar.

   Firm A: $

   Firm B: $

3. If sales increase by 15 percent to 13,800 units, by what percentage will each firms 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: %

4. Why are the percentage changes different?

   The answers differ because Firm A uses -Select-equity financingfinancial leverageItem 7 while Firm B uses -Select-equity financingfinancial leverageItem 8 . The successful use of -Select-equity financingfinancial leverageItem 9 magnifies the percentage increase in earnings when sales expand.