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Professor Stauffer is so obsessed with smoothies that he decided to open his own kiosk - Lucy's Juicees (he could have benefited from some marketing
Professor Stauffer is so obsessed with smoothies that he decided to open his own kiosk - Lucy's Juicees (he could have benefited from some marketing help when selecting the name). The kiosk's profits are driven by the amount of work Professor Stauffer does. If he works 10 hours each week at the kiosk, the company's EBIT will be $150,000 per year. If he works 20 hours per week, the company's EBIT will be $230,000 per year. The kiosk will require a $1,200,000 investment today. Assume there are no taxes and all profits are paid out to investors each year. The smoothie kiosk can be financed in two ways: (option 1) 100% equity: $600,000 investment today by Professor Stauffer + $600,000 from outside equity investors (option 2) 50% debt, 50% equity: a perpetual bond can be issued to raise $600,000 today (with coupon payments of $30,000 per year forever), with the remaining $600,000 equity investment being Professor Stauffer's equity. a) What are the future yearly cash flows to Professor Stauffer under each scenario (combinations of hours worked + financing method)? b) Under which form of financing is Professor Stauffer likely to work harder
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