Question
Ashley runs a small business that makes snow skis. She expects the business to grow substantially over the next three years. Because she is concerned
Ashley runs a small business that makes snow skis. She expects the business to grow substantially over the next three years. Because she is concerned about product liability and is planning to take the company public in year 2, she currently is considering incorporating the business. Pertinent financial data are as follows:
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Ashley expects her combined Federal and state marginal income tax rate to be 25% over the three years before any profits from the business are considered. Assume that the corporation will face a flat 21% Federal corporate income tax and no state income tax. Ashleys after-tax cost of capital is 10%, and the related present value factors are: for 2018, 0.8929; for 2019, 0.7972; and for 2020, 0.7118.
Additional Info about tax table
Enter all amounts as positive numbers. When required, round your answers to the nearest dollar.
a. Considering only these data, compute the present value of the future cash flows for the three-year period, assuming that Ashley incorporates the business and pays all after-tax income as dividends (for Ashleys dividends that qualify for the 15% rate).
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b. Considering only these data, compute the present value of the future cash flows for the period, assuming that Ashley continues to operate the business as a sole proprietorship.
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c. Should Ashley incorporate the business in year 1?
Income Tax RatesCorporations Taxable income The Tax is: But not Over- Of the Amount Over- 0 Over- 0 50,000 75,000 100,000 335,000 10,000,000 15,000,000 18,333,333 50,000 75,000 100,000 335,000 10,000,000 15,000,000 18,333,333 15% $ 7,500 + 25% 13,750 + 34% 22,250 + 39% 113,900 + 34% 3,400,000 + 35% 5,150,000 + 38% 35% 50,000 75,000 100,000 335,000 10,000,000 15,000,000Step by Step Solution
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