Culminating Activity #5 Monique and her two colleagues, Jim and Roz, are personal trainers at an upscale health spa in Kingston, ON. They want to start a health club that specializes in plans for people in the 50+ age group. The growing population in this age group and strong consumer interest in the health benefits of physical activity have convinced them they can profitably operate their own club. After deciding to incorporate, each of the three receives 20,000 no par value common shares on June 12, 2018, in exchange for their co-owned building ($180,000 market value) and the $120,000 total cash they contributed to the business. Monique, Jim and Roz now need to decide how to obtain financing for renovations, and equipment. They understand the difference between equity securities and debt securities, but do not understand the income tax, net income and EPS consequences of equity versus debt financing on the future of their business. Required: You have been hired as a consultant for the Health Spa. You have been asked to prepare notes for discussion with the three entrepreneurs in which you will compare the consequences of using equity versus debt financing. As part of your notes, show the differences in interest and income tax expense assuming $1,400,000 is financed. Assume 140,000 shares will be issued at $10 per in order to raise capital. Also assume the rate on the debt is 9%, the income tax rate is 30%, and income earned before tax is $160,000. This comparison can be completed using a table. Culminating Activity #5 Monique and her two colleagues, Jim and Roz, are personal trainers at an upscale health spa in Kingston, ON. They want to start a health club that specializes in plans for people in the 50+ age group. The growing population in this age group and strong consumer interest in the health benefits of physical activity have convinced them they can profitably operate their own club. After deciding to incorporate, each of the three receives 20,000 no par value common shares on June 12, 2018, in exchange for their co-owned building ($180,000 market value) and the $120,000 total cash they contributed to the business. Monique, Jim and Roz now need to decide how to obtain financing for renovations, and equipment. They understand the difference between equity securities and debt securities, but do not understand the income tax, net income and EPS consequences of equity versus debt financing on the future of their business. Required: You have been hired as a consultant for the Health Spa. You have been asked to prepare notes for discussion with the three entrepreneurs in which you will compare the consequences of using equity versus debt financing. As part of your notes, show the differences in interest and income tax expense assuming $1,400,000 is financed. Assume 140,000 shares will be issued at $10 per in order to raise capital. Also assume the rate on the debt is 9%, the income tax rate is 30%, and income earned before tax is $160,000. This comparison can be completed using a table
