PLEASE SOMEONE HELP WITH THIS? THIS IS THE THIRD TIME I AM POSTING TO HELP GET T
ID: 2733421 • Letter: P
Question
PLEASE SOMEONE HELP WITH THIS? THIS IS THE THIRD TIME I AM POSTING TO HELP GET THE SECOND SCENARION 40-50 HOURS PRICE NOT PERCENTAGE. THANK YOU
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 $590,000 per year; if he works a 50 hour week, the company's EBIT will be $705,000 per year. The company is currently worth $3.60 million. The company needs a cash infusion of $1.70 million, and it can issue equity or issue debt with an interest rate of 10 percent. Assume there are no corporate taxes.
.
a. What are the cash flows to Tom under each scenario? (Enter your answers in whole dollars, not millions of dollars. Do not round intermediate calculations and round your answers to the nearest whole dollar amount. (e.g., 32))
Scenario 1
Debt issue
Cash Flows
40 hour week $420,000
50 hour week $535,000
Scenario 2
Equity issue
Cash Flow
40 hour week $_______
50 hour week $_______
a. This section is correct
Debt Issue :
The company needs a cash infusion of 1.70 Million. If the company issues debt, the annual interest payment will be :
Interest = 1,700,000 * 10% = $170,000
The cash flow to the owner will be the EBIT minus the interest payments, or :
40-Hour week cash flow = 590,000 – 170,000 = $420,000
50-Hour week cash flow = 705,000 – 170,000 = $535,000
B) Equity Issue : This section is incorrect. Help please!!
If the company issues equity, the company value will increase by 1.70 Million. So, the current owner’s equity interest in the company will decrease to :
Tom’s Ownership percentage = 3,600,000 / (3,600,000 + 1,700,000) = 0.68
So, Tom’s cash flow under an equity issue will be 68% of EBIT, or :
40-Hour week cash flow = 590,000 * 68% = $401,200
50-Hour week cash flow = 705,000 * 68% = $479,400
.
a. What are the cash flows to Tom under each scenario? (Enter your answers in whole dollars, not millions of dollars. Do not round intermediate calculations and round your answers to the nearest whole dollar amount. (e.g., 32))
Explanation / Answer
Under Equity case, there will be no interest cost, So the EBIT is the Cash flow: Equity Issue Cash flows ($) 40 Hour week 590000 50 Hours week 705000 Question is asking just about cash flow.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.