PART II AND PART III ONLY "C" PLEASE

PART II AND PART III ONLY "C" PLEASE

Part II: Subsequent Expansions A few years after the initial expansion, Gonzales wants to build a plant and finance an operation that would manufacture and distribute its homemade salsa and related products to supermarkets throughout the United States and Mexico. Mr. Gonzales, CEO and family head, has begun planning this venture, even though construction is not expected to begin until the current expansion is complete and the company is financially stable, which might take several years. Even so, Mr. Gonzales has some ideas that he would like you to examine. The project's estimated cost is $30 million, which will be used to build a manufacturing facility and to set up the necessary distribution system. Gonzales tentatively plans to raise the $30 million by selling 10-year bonds, and its investment bankers have indicated that the firm can use either regular or zero coupon bonds. Regular coupon bonds would sell at par and would have annual payment coupons of 12 percent; zero coupon bonds would also be priced to yield 12 percent annually. Either bond would be callable after three years, on the anniversary C. Gonzales's bonds will be callable after three years. If the bonds were not callable, would the required interest rate be higher or lower than 12 percent? What would be the effect on the rate if the bonds were callable immediately? What are the advantages to Gonzales of making the bonds callable? Part III: Continuing Expansions A few years after the subsequent expansion, Gonzales wants to start a new company that will sell authentic sports memorabilia He plans to name the company Pro Athlete Remembrances, or PAR for short. The new business is still in the planning stages, so he has a few questions about how PAR should be organized when he starts the business and what he should do if the company becomes extremely successful in the future. Assume that you are hired to answer the following questions: C. Assume Mr. Gonzales successfully convert the business to a corporation. This corporation has $100,000 of taxableincome from operations plus $5,000 of interest income and $100,000 of dividend income. During the previous year, the company paid dividends equal to $8,000. What is its tax liability? Part II: Subsequent Expansions A few years after the initial expansion, Gonzales wants to build a plant and finance an operation that would manufacture and distribute its homemade salsa and related products to supermarkets throughout the United States and Mexico. Mr. Gonzales, CEO and family head, has begun planning this venture, even though construction is not expected to begin until the current expansion is complete and the company is financially stable, which might take several years. Even so, Mr. Gonzales has some ideas that he would like you to examine. The project's estimated cost is $30 million, which will be used to build a manufacturing facility and to set up the necessary distribution system. Gonzales tentatively plans to raise the $30 million by selling 10-year bonds, and its investment bankers have indicated that the firm can use either regular or zero coupon bonds. Regular coupon bonds would sell at par and would have annual payment coupons of 12 percent; zero coupon bonds would also be priced to yield 12 percent annually. Either bond would be callable after three years, on the anniversary C. Gonzales's bonds will be callable after three years. If the bonds were not callable, would the required interest rate be higher or lower than 12 percent? What would be the effect on the rate if the bonds were callable immediately? What are the advantages to Gonzales of making the bonds callable? Part III: Continuing Expansions A few years after the subsequent expansion, Gonzales wants to start a new company that will sell authentic sports memorabilia He plans to name the company Pro Athlete Remembrances, or PAR for short. The new business is still in the planning stages, so he has a few questions about how PAR should be organized when he starts the business and what he should do if the company becomes extremely successful in the future. Assume that you are hired to answer the following questions: C. Assume Mr. Gonzales successfully convert the business to a corporation. This corporation has $100,000 of taxableincome from operations plus $5,000 of interest income and $100,000 of dividend income. During the previous year, the company paid dividends equal to $8,000. What is its tax liability