1. Firm A has $10000 in assets entirely financed with equity.Firm Balsohas $1000

1. Firm A has $10000 in assets entirely financed with equity.Firm Balsohas $10000 in assets but these assets are financed by $5000indebt(with a 10 percent rate of interest) and $5000 in equity. Bothfirmssell10000 units of output at $2.50 per unit. The variable costs ofproductionare $1 and fixed production costs are $12000. (To ease thecalculationassume no income tax.)a. What is the operating income (EBIT)for both firms?b. What are the earnings after interest?c. If salesincrease by 10 percent to 11000 units by what percentagewill each firmsearnings after interest increase? To answer the questiondetermine theearnings after taxes and compute the percentageincrease in these earningsfrom the answers you derived in part b.d. Why are the percentage changesdifferent?