2. Agency Costs Tom Scott is the owner, president, and primary salesperson for Scott Manu- ,facturing. 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 $450,000 per year, and if he works ,a 50-hour week, the company’s EBIT will be $550,000 per year. The company is currently worth $2.7 million. The company needs a cash infusion of $1.5 million, and it can issue equity or issue ,debt with an interest rate of 9 percent. Assume there are no corporate taxes. ,, a. What are the cash flows to Tom under each scenario? , , b. Under which form of financing is Tom likely to work harder? , , c. What specific new costs will occur with each form of financing? ,
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