Tom Scott is the owner, president, and primary salesperson for Scott Manufacturing. Because of this, the companys

Question:

Tom Scott is the owner, president, and primary salesperson for Scott Manufacturing. Because of this, the company’s profits are driven by the amount of work Tom does. If he works 40 hours each week, the company’s EBIT will be $475,000 per year, and if he works a 50-hour week, the company’s EBIT will be $580,000 per year. The company is currently worth $3.2 million. The company needs a cash infusion of $1.4 million, and it can issue equity or issue debt with an interest rate of 8 percent. Assume there are no corporate taxes.
a. What are the cash flows to Tom under each scenario?
b. Under which form of financing is Tom likely to work harder?
c. What specific new costs will occur with each form of financing?

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Corporate Finance Core Principles and Applications

ISBN: 978-1259289903

5th edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan

Question Posted: