Kat Owns and Manages a Small All-Equity Firm

Multiple Choice

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 45-hour week as her cash flow will be $8,550 higher than a 45-hour week with debt.
D) equity with a 40-hour week as that option provides her with the highest cash flow.
E) debt with a 45-hour week as her cash flow will be $40,550.