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 $605,000 per year; if he works a 50-hour week, the company's EBIT will be $735,000 per year. The company is currently worth $3.75 million. The company needs a cash infusion of $1.85 million, and it can issue equity or issue debt with an interest rate of 9 percent. Assume there are no corporate taxes. a. What are the cash flows to Tom under each scenario?

I only need the following: Thanks

Scenario-2
	Equity issue:

  

	Cash flows
40-hour week	$
50-hour week

Answer 1

a) Interest expense $ 166,500 =1850000*9% Scenario - 1 Debt issue: Cash flows 40-hour week EBIT-Interest expense 458,00 5605000-166500 50-hour week EBIT-Interest expense $ 568,500 -735000-166500 Total ownership percentage 66.96% =3750000/(3750000+1850000) Scenario - 2: Equity issue: 40-hour week EBITxOwnership % 50-hour week EBITXOwnership % $ 405,108 |-605000*66.96% $492,156 1-735000*66.96% b) Tom will work hard in debt issue. (Tom will gain more)

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