Calculate the cash flow-agency costs, Financial Accounting

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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 $405,000 per year; if he works a 50-hour week, the company's EBIT will be $505,000 per year. The company is currently worth $2.7 million. The company needs a cash infusion of $1.32 million, and it can issue equity or issue debt with an interest rate of 9.5 percent. Assume there are no corporate taxes.

Requirement 1:

What are the cash flows to Tom under each scenario? (Do not include the dollar signs ($). Round your answers to the nearest whole dollar amount. (e.g., 32))


Debit issue Equity issue
40 hour week cash flow $ ________ $ ______
50 hour week cash flow $ _______ $ ______

Requirement 2:

Under which form of financing is Tom likely to work harder?
(i) Debit issue ; (ii) Equity issue

 


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