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Agency Costs Tom Scott is the owner, president, and primary salesperson for Scott Manu- facturing. Because of this, the companyâ??s profits are driven by the amount of work Tom does. If he works 40 hours each week, the companyâ??s EBIT will be $450,000 per year, and if he works a 50-hour week, the companyâ??s EBIT will be $550,000 per year. The company is currently worth $2.7 million. The company needs a cash infusion of $1.5 million, and it 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?
b. Under which form of financing is Tom likely to work harder?
c. What specific new costs will occur with each form of financing?
Senior management of Baldwin meets to estimate their investment plan for the year. They decide to fully fund a plant and machine buy through issuing 50,000 shares of stock plus a new bond issue.
Discuss the use of disability insurance in financial planning, including the tax ramifications; OR Discuss the income and estate tax treatment of life insurance proceeds, giving an example.
You just won a prize and will receive $1,000 today plus $1,000 one year from now. What is this prize worth to you today if you can earn 6.5 percent annually on your investments ?
The probability of a normal economy is 74 percent while the probability of a recession is 15 percent and the probability of a boom is 11 percent. What is the standard deviation of these expected returns?
Kaiser Industries has bonds on the market making annual payments, with 14 years to maturity, and selling for $1,382.01. At this price, the bonds yield 7.5 percent. What is the coupon rate?
When Global Partners went public in September 2008, the offer price was $22.00 per share and the closing price at the end of the first day was $24.10. The firm issued 5.30 million shares. What was the loss to the company due to underpricing?
Bree's Tennis Supply's market-to-book ratio is currently 9.4 times and PE ratio is 20 times. If Bree's Tennis Supply's common stock is currently selling at $20.50 per share, what is the book value per share and earnings per share?
Stan is expanding his business and will sell common stock for needed funds. if the current risk-free rate is 4% and the expected market return is 12%.
Bannister's profit margin is 5% and its payout ratio is 60%. How large a sales increase can the company achieve without having to raise funds externally?
If the firm is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows?
What does time value of money mean? Why is this concept significant in accounting? Under what circumstances would we use time value of money calculations?
what is a financial instrument that agrees to pay an equal amount of money per period into the indefinite future.
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