Marcus Owns and Manages OLK,which Is an All-Equity Firm

question 4

Multiple Choice

Marcus owns and manages OLK,which is an all-equity firm.If he works 40 hours a week,the firm's annual EBIT will be $96,000.If he increases his hours to 45 a week,EBIT will increase to $108,000.The firm has a current value of $926,000.Marcus needs $250,000 to fund a new project.The firm can borrow the needed funds at an interest rate of 6 percent,or it can issue equity.Ignore taxes.Marcus will prefer

• A)debt with a 40-hour week as that option provides him with the highest cash flow.
• B)debt with a 45-hour week as his cash flow will be $11,000 greater than his next best option.
• C)equity with a 45-hour week as his cash flow will be $85,041.
• D)equity with a 40-hour week as that option provides him with the lowest cash flow.
• E)debt with a 45-hour week as his cash flow will be $7,959 higher than if he works 45 hours and shares his equity.

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Definitions:

Cost Method

An accounting approach used for recording investments, where the investment is recorded at its acquisition cost without any subsequent change in its value unless there is an impairment or disposal.

Equity Method

An accounting method used to record investments in which the investor has significant influence but not full control.

Total Dividends

The total sum of money paid to shareholders out of a company's earnings.

Equity Method

An accounting technique used to record an investment in another company, where the investment is initially recorded at cost and subsequently adjusted to reflect the investor's share of the investee's profit or loss.