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:

Financial Statement

A formal record of the financial activities and position of a business, person, or other entity, often including balance sheet, income statement, and cash flow statement.

Base Amount

The initial sum or value used as a reference point for calculations, comparisons, or adjustments.

Income Level

The amount of revenue generated by an individual or organization before any deductions are made.

Debt-to-Equity Ratio

A financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets.