Kat owns and manages a small all-equity firm. If she works 40 hours a week, the firm’s annual EBIT will be $41,000. If she increases her hours to 45 a week, EBIT will increase to $48,000. The firm has a current value of $190,000. Kat wants to expand the business and needs $114,000 to do so. The firm can borrow the needed funds at an interest rate of 7.5 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 $7,000 greater than her next best option
C) equity with a 40-hour week as that option provides her with the highest cash flow
D) debt with a 45-hour week as her cash flow will be $40,550