Marcus Owns and Manages OLK Which Is an All-Equity Firm

question 30

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 $68,000.If he increases his hours to 65 a week,EBIT will increase to $148,000.The firm has a current value of $680,000.Marcus wants to expand the business and needs $320,000 to do so.The firm can borrow the needed funds at an interest rate of 8 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 65-hour week as his cash flow will be $11,000 greater than his next best option.
• C)equity with a 65-hour week as his cash flow will be $100,640.
• D)equity with a 40-hour week as that option provides him with the highest cash flow.
• E)debt with a 65-hour week as his cash flow will be $21,760 higher than if he works 65 hours and shares his equity.

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Definitions:

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The gradual development and progression of societies and cultures over time through mechanisms such as adaptation, selection, and innovation.

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The process through which species of organisms undergo changes over time through genetic variation and natural selection.

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