Firm A has $10,000 in assets entirely financed with equity. Firm B also has $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 production are $1, and fixed production costs are $12,000. (To ease the calculation, assume no income tax.)

To analyze the financial performance of both firms, we will start by calculating their income statements:

1. Firm A:
- Sales: 10,000 units * $2.50 = $25,000
- Variable costs: 10,000 units * $1 = $10,000
- Fixed costs: $12,000
- Total costs: $10,000 (variable costs) + $12,000 (fixed costs) = $22,000
- Profit before interest and taxes: $25,000 (sales) - $22,000 (total costs) = $3,000
- Since Firm A is entirely financed with equity, it has no interest expense or tax implications.
- So, the net profit for Firm A is also $3,000.

2. Firm B:
- Sales: 10,000 units * $2.50 = $25,000
- Variable costs: 10,000 units * $1 = $10,000
- Fixed costs: $12,000
- Total costs: $10,000 (variable costs) + $12,000 (fixed costs) = $22,000
- Profit before interest and taxes: $25,000 (sales) - $22,000 (total costs) = $3,000
- Interest expense: $5,000 (debt) * 10% = $500
- Profit before taxes: $3,000 (profit before interest and taxes) - $500 (interest expense) = $2,500
- Net profit after taxes: Since there is no information about income tax, we assume no income tax.
- So, the net profit for Firm B is also $2,500.

To analyze the financial structure, we can calculate the Return on Equity (ROE) for both firms:

1. ROE for Firm A:
- ROE = Net Profit / Total Equity
- Since Firm A is entirely financed with equity, Total Equity is $10,000.
- ROE = $3,000 (net profit) / $10,000 (total equity) = 30%

2. ROE for Firm B:
- ROE = Net Profit / Total Equity
- The total equity of Firm B is $5,000.
- ROE = $2,500 (net profit) / $5,000 (total equity) = 50%

Comparing the ROEs, we can see that Firm B has a higher ROE than Firm A, indicating better financial performance. This is because Firm B uses leverage (debt financing) to increase its returns, assuming the interest rate does not exceed the return on assets.