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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 $585,000 per year, and if he works a 50-hour week, the company's EBIT will be $695,000 per year. The company is currently worth $3.55 million. The company needs a cash infusion of $1.65 million, and it can issue equity or issue debt with an interest rate of 9 percent. Assume there are no corporate taxes. What are the cash flows to Tom under each scenario? (Do not round intermediate a. calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole dollar, e.g., 1,234,567.) b. Under which form of financing is Tom likely to work harder?

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 $585,000 per year, and if he works a 50-hour week, the company's EBIT will be $695,000 per year. The company is currently worth $3.55 million. The company needs a cash infusion of $1.65 million, and it can issue equity or issue debt with an interest rate of 9 percent. Assume there are no corporate taxes. What are the cash flows to Tom under each scenario? (Do not round intermediate a. calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole dollar, e.g., 1,234,567.) b. Under which form of financing is Tom likely to work harder?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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 $585,000 per year, and if he works a 50-hour week, the company's EBIT will be $695,000 per year. The company is currently worth $3.55 million. The company needs a cash infusion of $1.65 million, and it can issue equity or issue debt with an interest rate of 9 percent. Assume there are no corporate taxes. What are the cash flows to Tom under each scenario? (Do not round intermediate a. calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole dollar, e.g., 1,234,567.) b. Under which form of financing is Tom likely to work harder? Debt issue and 40-hour week Debt issue and 50-hour week Equity issue and 40-hour week Equity issue and 50-hour week b. Will work harder with a. Equity issue
Transcribed Image Text: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 $585,000 per year, and if he works a 50-hour week, the company's EBIT will be $695,000 per year. The company is currently worth $3.55 million. The company needs a cash infusion of $1.65 million, and it can issue equity or issue debt with an interest rate of 9 percent. Assume there are no corporate taxes. What are the cash flows to Tom under each scenario? (Do not round intermediate a. calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole dollar, e.g., 1,234,567.) b. Under which form of financing is Tom likely to work harder? Debt issue and 40-hour week Debt issue and 50-hour week Equity issue and 40-hour week Equity issue and 50-hour week b. Will work harder with a. Equity issue
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