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Agency Costs 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 $525,000 per year, and if he works a 50-hour week, the company's EBIT will be $650,000 per year. The company is currently worth $2.9 million. The company needs a cash infusion of $1.3 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?
Lobo Banks normally provides term loans that require repayment in a series of equal annual installments. If a $10 million loan is made, what would be the annual end-of-year payments, assuming the following? a. A 10 percent loan for 12 years b. A 10 ..
A project has an initial cost of 40000, expected cash inflows of 9000 per year for 7 years and a cost of capital of 11%. What is the discounted payback period?
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Suppose you hear the claim that a given test, such as the chi-square test for normality, is not very powerful.- What exactly does this mean?
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Find out the current price of the zero coupon bond with the 6% yield to maturity that matures in 15 years?
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If six-month LIBOR is 4½ percent over the first six-month interval and 53/8 percent over the second six-month interval, how much will Grecian Tile pay in interest over the first year of its Eurodollar loan?
LL's tax rate is 40 percent and its required return on projects such as this one is 17 percent. Should lisowksi laptops offer the new computer and why?
Your boss, the chief executive officer (CEO), realizes that you do not have much practice in this higher level, decision-making process and has asked you to write a memo describing your understanding of how to make important decisions.
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