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.