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Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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2 14.28 points eBook Print References Problem 17-2 Agency Costs 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 50 hours each week, the company's EBIT will be $560,000 per year; if he works a 60-hour week, the company's EBIT will be $645,000 per year. The company is currently worth $3.3 million. The company needs a cash infusion of $1.4 million and 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? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) b. Under which form of financing is Tom likely to work harder? a. Debt issue and 50-hour week a. Debt issue and 60-hour week a. Equity issue and 50-hour week a. Equity issue and 60-hour week b. Which form of financing is Tom likely to work harder?
Transcribed Image Text:2 14.28 points eBook Print References Problem 17-2 Agency Costs 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 50 hours each week, the company's EBIT will be $560,000 per year; if he works a 60-hour week, the company's EBIT will be $645,000 per year. The company is currently worth $3.3 million. The company needs a cash infusion of $1.4 million and 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? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) b. Under which form of financing is Tom likely to work harder? a. Debt issue and 50-hour week a. Debt issue and 60-hour week a. Equity issue and 50-hour week a. Equity issue and 60-hour week b. Which form of financing is Tom likely to work harder?
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