Tom Scott is the owner, president, and primary salesperson for Scott Manufacturing. Because of this, the company's profit are driven by the amount of work Tom does. If he works 40 hrs a wk, the company's EBIT will be $550K per yr. The company is currently worth $2.7M. The company needs a cash infusion of $1.5M, and it can issue equity or issue debt with an interest rate of 9%. Assume there are no corporate tax.
a) What are the cash flows to Tom under each scenario?
b) Under which form of financing is Tom more likely to work harder?
c) What specific new costs will occur with each form of financing?