Costs of satisfying funding needs through debt issue

Assignment Help Financial Management
Reference no: EM132071477

Tom is the president and sole salesperson for Tom Manufacturing. He also owns 90 percent of the business, which currently has no debt. Due to his central role in the company, profits are driven by the amount of effort Tom puts into the company. If he works 40 hours each week, the company EBIT will be $550,000 per year; if he works a 50-hour week, the company's EBIT will be $625,000 per year. The company is currently worth $3.2 million and pays no corporate taxes.

The company needs a cash infusion of $1.3 million, regardless of how much Tom works. The company is considering raising the necessary funds through either an equity issue or a debt issue with an interest rate of 8%.

If the company raises the necessary funds through a debt issue, the direct cost of that are the interest payments to creditors. What are indirect costs of satisfying funding needs through a debt issue?

costs of financial distress incurred in the event of bankruptcy.

None of these answers are correct.

expenditures on perquisites and disincentives to exert effort.

risk of bankruptcy.

Reference no: EM132071477

Questions Cloud

Costs of various imperfections : Costs of Various Imperfections: Steinberg Corporation and Dietrich Corporation are apparently identical firms except that Dietrich has more leverage.
Company has debt outstanding with face value : Your company has debt outstanding with a face value of 6 million dollars. What explains this difference?
What are indirect costs of satisfying funding : What are the indirect costs of satisfying funding needs through an equity issue? risk of bankruptcy.
Identical in every way except for their capital structures : Levered, Inc. and Unlevered, Inc. are identical in every way except for their capital structures.
Costs of satisfying funding needs through debt issue : the direct cost of that are the interest payments to creditors. What are indirect costs of satisfying funding needs through a debt issue?
What is the apr of the loan : The loan is for $39,500, and the monthly payments are $700. If the loan will be paid off over the next 71 months, what is the APR of the loan?
What were the digby corporation retained earnings : What were the Digby Corporation's retained earnings?
What is the average receivables balance : What is the average receivables balance? What is the receivables turnover? Should Maddox Resources offer the discount?
The production of tile for the home-building industry : Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the production of tile for the home-building industry.

Reviews

Write a Review

Financial Management Questions & Answers

  Foreign company acquisition

Acquisition by a foreign company and the effects of that decision and the results of foreign exchange in Euro and the exchange rate differences.

  Financial management for profit and non profit organizations

In this essay, we are going to discuss the issues of financial management in a non-profit organisation.

  Method for estimating a venture''s value

Evaluate venture's present value, cash and surplus cash and basic venture capital.

  Replacement analysis

This document show the Replacement Analysis of modling machine. Is replacement give profit to company or not?

  Business finance task - capital budgeting

Your company is considering using the payback period for capital-budgeting. Discuss the advantages and disadvantages of this technique.

  Analysis of the investment

In this project, you will focus on one of these: the additional cost resulting from the purchase of an apple press (a piece of equipment required to manufacture apple juice).

  Conduct a what-if analysis

Review the readings and media for this unit, including the Anthony's Orchard case study media. Familiarise yourself with the Anthony's Orchard company and its current situation.

  Determine operational expenditures

Organisations' behaviour is guided by financial data. In the short term, such data will help determine operational expenditures; in the long term, historical data may help generate forecasts aimed at determining strategic plans. In both instances.

  Personal financial management

How much will you have left over each half year if you adopt the latter course of action?

  Sources of finance for expansion into new foreign markets

A quoted company is considering several long-term sources of finance for expansion into new foreign markets.

  Long term financial planning

This assignment is designed for analyze Long term financial planning begins with the sales forecast and the key input in the long term fincial planning.

  Explain the role of fincial manager

This assignment explain the role of fincial manager, function of manger. And what are the motives of financial manager.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd