Mary owns 100 percent of a gift shop with an equity value of $150,000. If she keeps the shop open 5 days a week, EBIT is $75,000. If the shop remains open 6 days a week, EBIT increases to $92,000 annually. Mary needs an additional $50,000 which she can raise today by either selling stock or issuing debt at an interest rate of 7 percent. The principal amount would be repaid at the end of the fifth year. Ignore taxes. What will be the cash flow for this year to Mary if she issues debt, remains open 6 days a week, and distributes all the residual cash flow to the shareholders?

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andromache andromache · Answer 1 · 2020-05-11T11:19:01+02:00

Answer:

$88,500

Explanation:

The computation of the residual cash flow for the year is shown below:

= EBIT - interest

where,

EBIT is $92,000

And, the interest on debt is

= $50,000 × 7%

= $3,500

So the residual cash flow is

= $92,000 - $3,500

= $88,500

We simply deduct the interest on debt from the EBIT so that the residual cash flow could come

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tallinn tallinn · Answer 2 · 2022-04-01T13:38:10+02:00

When deducting the interest on the debt from the EBIT the residual cash flow could come is = $88,500

Now, The computation of the residual cash flow for the year is shown below:

Then = EBIT - interest

where,

EBIT is $92,000

And also, the interest on debt is

Then = $50,000 × 7%

Now, = $3,500

So the residual cash flow is

Then = $92,000 - $3,500

Therefore, = $88,500

Then We deduct the interest on the debt from the EBIT so that the residual cash flow could come

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