Answer:
The computation is shown below:
Explanation:
The computation is shown below:
a. In the first case i.e Debt issue which is
= EBIT - interest expense
where,
Interest expense is
= $2,150,000 × 7%
= $150,500
So for 40 hours, it would be
= $635,000 - $150,500
= $484,500
And, for 50 hours, it would be
= $795,000 - $150,500
= $644,500
In the second case i.e equity issue which is
= EBIT × ownership interest
where,
ownership interest is
= $4,050,000 ÷ ($4,050,000 + $2,150,000)
= 65.32%
So for 40 hours week, it would be
= $635,000 × 65.32%
= $414,782
And, for 50 hours week, it would be
= $795,000 × 65.32%
= $519,284
b. So, the tom would likely to work harder in Debt issue
The scenarios for financing Tom are for working hard will be best suited when he will issue higher debts, that is in case 1 when working for 50 hours.
b. The debt issues are chosen as they are charging less amount of expense to Tom due to which the net cash flow in hand of Tom is higher in case when Tom issues debts of $2.15 million with an interest rate of 7% per year.
Computation:
Given,
EBIT that is Earning before interest and tax. It is different for both the cases and also different for different working hours.
a. The cash flow from various scenarios are calculated in the image attached below.
Working Note:
Computation of Ownership interest rate:
[tex]\begin{aligned}\text{Ownership Interest}&=\dfrac{\text{Current Net Worth}}{\text{Current Net Worth+Debts}} \\&=\dfrac{\$4,050,000} {\$4,050,000 + \$2,150,000}\\&= 65.32\%\end{aligned}[/tex]
To know more about cash flows, refer to the link:
https://brainly.com/question/533944
