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Tom Scott is the oner , president and primary sales person for scott manufacturing. Because of this the company's profits are driven by the amount of...
Tom Scott is the oner , president and primary sales person 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 weak, the company's EBIT will be $400,000 per year, if he works 50 hours each week, the company's EBIT will be $500,000 per year. The company is currently worth $2.5 million. The company needs a cash infusion of $2.5 million, and it can issue debt with an interest rate of 8 percent. Assume there are no corporate taxes.What are the cash flows to Tom under each scenario?Under which form of financing is Tom likely to work harder?What specific new costs will occur with each form of financing?
