Kat Owns and Manages a Small All-Equity Firm

question 25

Multiple Choice

Kat owns and manages a small all-equity firm.If she works 40 hours a week,the firm's annual EBIT will be $38,000.If she increases her hours to 45 a week,EBIT will increase to $43,000.The firm has a current value of $210,000.Kat wants to expand the business and needs $76,000 to do so.The firm can borrow the needed funds at an interest rate of 6.7 percent,or it can issue equity.Ignore taxes.Kat will prefer

• A)debt with a 40-hour week as that option provides her with the highest cash flow.
• B)debt with a 45-hour week as her cash flow will be $5,000 greater than her next best option.
• C)equity with a 45-hour week as her cash flow will be $5,006 higher than a 45-hour week with debt.
• D)equity with a 40-hour week as that option provides her with the highest cash flow.
• E)debt with a 45-hour week as her cash flow will be $31,573.

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Definitions:

Accounts Receivable

Money owed to a business by its customers for goods or services delivered but not yet paid.

Depreciation Expense

An accounting method of allocating the cost of a tangible asset over its useful life, reflecting wear and tear, or obsolescence.

Depreciation Expense

Depreciation expense represents the allocation of the cost of tangible assets over their useful lives.

Decrease in Payable

A reduction in the amount a company owes to its suppliers or creditors, indicating payments have been made.