Tom Scott is the owner, president, and primary salesperson for Scott Manufacturing. Because of this, the company's profits are driven by the amount of work Tom does. If he works 40 hours each week, the company's EBIT will be $605,000 per year, and if he works a 50-hour week, the company's EBIT will be $735,000 per year. The company is currently worth $3.75 million. The company needs a cash infusion of $1.85 million, and it can issue equity or issue debt with an interest rate of 9 percent. Assume there are no corporate taxes.

What are the cash flows to Tom under each scenario? (Do not round intermediate a. calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole dollar, e.g., 1,234,567.) b. Under which form of financing is Tom likely to work harder? a. Debt issue and 40-hour week. Debt issue and 50-hour week Equity issue and 40-hour week Equity issue and 50-hour week Will work harder with b.

Tom Scott is the owner, president, and primary salesperson for Scott Manufacturing. Because of this, the company's profits are driven by the amount of work Tom does. If he works 40 hours each week, the company's EBIT will be $605,000 per year, and if he works a 50-hour week, the company's EBIT will be $735,000 per year. The company is currently worth $3.75 million. The company needs a cash infusion of $1.85 million, and it can issue equity or issue debt with an interest rate of 9 percent. Assume there are no corporate taxes. What are the cash flows to Tom under each scenario? (Do not round intermediate a. calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole dollar, e.g., 1,234,567.) b. Under which form of financing is Tom likely to work harder? Mid States Company is a regional chain department store. It will remain in business for one more year. The probability of a boom year is 60 percent and the probability of a recession is 40 percent. It is projected that the company will generate a total cash flow of $203 million in a boom year and $94 million in a recession. The company's required debt payment at the end of the year is $128 million. The market value of the company's outstanding debt is $101 million. The company pays no taxes. What payoff do bondholders expect to receive in the event of a recession? (Do not a. round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar, e.g., 1,234,567.) What is the promised return on the company's debt? (Do not round intermediate b. calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) What is the expected return on the company's debt? (Do not round intermediate c. calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)