UPENN: LOOSE LEAF CORP.FIN W/CONNECT
17th Edition
ISBN: 9781260361278
Author: Ross
Publisher: McGraw-Hill Publishing Co.
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Textbook Question
Chapter 17, Problem 2QP
Agency Costs Tom Scott is the owner, president and primary salesperson for Scott Manufacturing. Because of this, the company’s profits arc 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; if he works a 50-hour week, the company’s EBIT will be $560,000 per year. The company is currently worth $2.9 million. The company needs a cash infusion of $1.2 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?
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Students have asked these similar questions
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 45 hours each week, the company's EBIT will be $555,000 per year; if he works a
55-hour week, the company's EBIT will be $635,000 per year. The company is currently
worth $3.25 million. The company needs a cash infusion of $1.35 million and can issue
equity or issue debt with an interest rate of 7 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 45-hour week
a. Debt issue and 55-hour week
a. Equity issue and 45-hour week
a. Equity issue and 55-hour week
b. 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 50 hours each week, the company's EBIT will be $645,000 per year; if he works a 60-hour week, the company's EBIT will be $815,000 per year. The company is currently worth $4.15 million. The company needs a cash infusion of $2.25 million and 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? (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 young mechanical engineer is considering establishing his own small company. Aninvestment of P400,000 will be required which will be recovered in 15 years. It is estimatedthat sales will be P800,000 per year and that operating expenses will be as follows.
(see attached photo)
The man will give u his regular job paying P216,000 per year and devote full time to the operation of the business; this will result in decreasing labor cost by P40,000 per year, material cost by P28,000 per year and overhead cost by P32,000 per year. If the man expects to earn at least 20% of his capital, should he invest?
Chapter 17 Solutions
UPENN: LOOSE LEAF CORP.FIN W/CONNECT
Ch. 17 - Bankruptcy Costs What are the direct and indirect...Ch. 17 - Stockholder Incentives Do you agree or disagree...Ch. 17 - Capital Structure Decisions Due to large losses...Ch. 17 - Cost of Debt What steps can stockholders take to...Ch. 17 - MM and Bankruptcy Costs How does the existence of...Ch. 17 - Agency Costs of Equity What are the sources of...Ch. 17 - Observed Capital Structures Refer to the observed...Ch. 17 - Bankruptcy and Corporate Ethics As mentioned in...Ch. 17 - Bankruptcy and Corporate Ethics Finns sometimes...Ch. 17 - Prob. 10CQ
Ch. 17 - Firm Value Janetta Corp. has EBIT of 5850,000 per...Ch. 17 - Agency Costs Tom Scott is the owner, president and...Ch. 17 - Nonmarketed Claims Dream, Inc., has debt...Ch. 17 - Prob. 4QPCh. 17 - Capital Structure and Growth Edwards Construction...Ch. 17 - Prob. 6QPCh. 17 - Agency Costs Fountain Corporations economists...Ch. 17 - Financial Distress Good Time Company is a regional...Ch. 17 - Personal Taxes, Bankruptcy Costs, and Firm Value...Ch. 17 - Personal Taxes, Bankruptcy Costs, and Firm Value...Ch. 17 - What is the expected value of the company in one...Ch. 17 - Prob. 2MCCh. 17 - One year from now, how much value creation is...Ch. 17 - Prob. 4MCCh. 17 - Prob. 5MCCh. 17 - Prob. 6MC
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