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

question 27

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:

Direct Labor

The wages and salaries of employees who are directly involved in the production of goods or services.

Manufacturing Overhead

All manufacturing costs that are not directly associated with the production of goods, such as utilities, rent, and salaries for managers.

Direct Materials

The raw materials that can be physically and directly associated with manufacturing the end product.

Factory Overhead

All indirect costs associated with the production process, such as salaries for supervisors and costs for utilities, not directly attributed to specific units of products.