Corporate Finance Case Study

1. Your family purchased 118 Mulberry Street, New York City in the late 19^th century (approximately 1882) when that area was known as Little Italy and the area was primarily the home for Italian immigrants. A member of your family has continuously owned that building since then. The original purchase price was $ 4,250. There has not been a mortgage on the building for many years.
2. Your immediate family now controls the building through inheritance. The only costs are building maintenance, taxes and insurance. The rent from the floors above street level provides sufficient income to pay all of the operating expenses of the building.
3. You and your siblings decide that you want to go into the gifts and souvenir business. Based on the location of the building (just off the corner of Canal Street, which is the main traffic street for that area) you all feel that this business will produce significant Accounting Profits.
4. After a few years in business, you and your two siblings are enjoying the fact that the business is very profitable, earning $ 300,000 per year in Accounting Profits, which you split evenly as all three siblings spend most of their awake time on site at the store. Therefore each of you makes $ 100,000 per year.
   1. You each have calculated that each of you are working 50 weeks of the year, 7 days per week and approximately 14 hours per day. (100 hours per week.)
      1. What is the hourly pay rate for the siblings?
         1. Assume they all get paid at the same rate.
   2. The only drawback is that each sibling pays for their own health and insurance benefits.

5. At the end of the fourth year, you read a write up on-line on something called Economic Profits. Effectively, this method of profit calculation takes into account economic alternatives to current management financial decisions and compares what is to what could be.
6. Based on that you and your two siblings make the following analysis to calculate Economic Profits for your business.

7. ECONOMIC PROFIT CALCULATION:

1. First the Facts:
2. Current Rent (CR) for the ground floor space (1500 sq. ft.) = $ 0/Month = $ 0 annual rent
3. Market Rent (MR) for ground floor space is $ 150 sq. foot per year= $ 225,000 per year.
4. Current income (CI) per sibling = $ 100,000 for a 7 day work week with 2 weeks vacation (based on $ 300,000/yr. profit). (See Para. 4 above).
5. Job replacement income (RI) per sibling (avg.) = $ 80,000/year for a 5 day work week for 52 weeks with two weeks paid vacation and a full range of health and insurance benefits paid for by the new employer.
   1. Replacement Job requires 60 hours of work per week.
   2. Benefits are worth $ 20,000 per year.
   3. Everyones tax rate is 50%.
   4. Replacement Job Benefits are tax-exempt.

HERE ARE THE QUESTIONS:

6. What is the ECONOMIC RENT OF THE STORE?
7. What is The ANNUAL ECONOMIC INCOME FOR THE THREE OF THEM (COMBINED) FOR THE ACTIVITY OF RUNNING THE STORE?
8. What about benefits?
9. What is the hourly wage differential?

WHAT IS THE ECONOMIC COST (OR PROFIT) OF THE SOUVENIR SHOP ???

1. THIS IS FOR ALL THREE SIBLINGS
   10. Economic Cost of the Rent
   11. Economic Cost of Wages =
   12. (Benefits loaded and hourly pay adjusted).

TOTAL ECONOMIC COST FOR THE VENTURE =

WHAT WOULD YOU DO AND WHY???????

Do you need more information to make this decision????

What are the risks involved with this decision ??