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Mary owns a gift shop valued at $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 by either selling stock or issuing debt that will require annual payments of $7,120 for interest and principal. Ignore taxes. What will the cash flow for the year be to Mary if she issues debt and remains open 5 days a week

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Answer: $67,880

Explanation:

In the above scenario, it is given that, if Mary keeps the shop open 5 days a week, Earnings before Interest and Tax is $75,000.

If she issues debt then there will be annual payments of $7,120.

So then her cashflow of she's open for 5 days will be,

= EBIT - Interest

= 75,000 - 7,120

= $67,880

Mary's cash flow for the year if she issues debt and remains open 5 days a week is $67,880

If Mary issues debt and stays open five days a week for the entire year, her cash flow will be $67,880.

Explanation:

In the scenario above, it is assumed that Mary will keep the shop open 5 days a week, resulting in earnings before interest and tax (EBIT) of $75,000.

If she takes on debt, she will be responsible for $7,120 in annual installments.

So, if she's open for 5 days, her cash flow will be,

[tex]= \text{Earnings Before Interest and Tax (EBIT) - Interest}\\= 75,000 - 7,120\\= 67,880 \text{ dollars}[/tex]

As a result, Mary's cash flow for the year is $67,880 if she issues debt and remains open 5 days a week.

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