7. Dog Delight must go declared Marv Gold, owner and majority shareholder of the publicly traded PPI. PET Publications, Inc. was the industry leading publisher of magazines for pet owners.

Our shareholders expect a 20% return on sales. All of our books Bird World, Feline Fancy, Reptile World clear the 20% hurdle. But Dog Delight only makes 10%. Sure, it generates $2 million in new operating losses per year, which partly offsets the $20 million of taxable income from the rest of the organization. I think we should sell it to Animal Publications.

Animal Publications was their major rival in the industry. It was comparable in sales and assets ($30 million and $150 million, respectively) but consisted of 20 smaller publications which did not have the brand recognition of PPIs four publications. Data on public 10K reports indicated the rival was paying taxes at a 34% rate.

As Chief Financial Officer, you decided to gather more facts before moving forward with the sale:

• Feline Fancy was the flagship publication with a circulation double that of any of the other three magazines.
• Advertising revenues have declined significantly over the last three years.
• If the magazine is sold, it will sell for $30 million with a tax basis of $10 million in assets and a $20 million taxable gain will result.
• If the magazine is spun off into a separate subsidiary, it can be operated or sold. If retained, PPI earnings per share (EPS) would go up to $50, while EPS for the subsidiary would be $20. If the subsidiary is sold, there would be a capital gain of $20 million.

What would you recommend to Mr. Gold?