Marcus Owns and Manages OLK Which Is an All-Equity Firm

Multiple Choice

Marcus owns and manages OLK which is an all-equity firm.If he works 40 hours a week,the firm's annual EBIT will be $68,000.If he increases his hours to 65 a week,EBIT will increase to $148,000.The firm has a current value of $680,000.Marcus wants to expand the business and needs $320,000 to do so.The firm can borrow the needed funds at an interest rate of 8 percent or it can issue equity.Ignore taxes.Marcus will prefer:

A) debt with a 40-hour week as that option provides him with the highest cash flow.
B) debt with a 65-hour week as his cash flow will be $11,000 greater than his next best option.
C) equity with a 65-hour week as his cash flow will be $100,640.
D) equity with a 40-hour week as that option provides him with the highest cash flow.
E) debt with a 65-hour week as his cash flow will be $21,760 higher than if he works 65 hours and shares his equity.