Problem 1-10 (LO. 4, 5)

Ashley runs a small business in Boulder, Colorado, 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:

	Year 1	Year 2	Year 3
Sales revenue	$150,000	$320,000	$600,000
Tax-free interest income	5,000	8,000	15,000
Deductible cash expenses	30,000	58,000	95,000
Tax depreciation	25,000	20,000	40,000

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. Her after-tax cost of capital is 10%, and the related present value factors are: for 2017, 0.8929; for 2018, 0.7972; and for 2019, 0.7118.

Click here to access the tax table to use for this problem.

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).

Use a flat 21% for the rate, dont use 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 Ashley's dividends that qualify for the 15% rate). Year 1 Year 2 Year 3 Taxable income $ 95,000 $ 242,000 $ 465,000 Corporate tax liability Cash available for dividends before taxes $ 125,000 $ 270,000 $ 520,000 Less: corporate tax liability Equals: cash available for dividends after taxes Less: tax on dividend at 15% rate After-tax cash flow Present value of cash flow 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. Year 1 Year 2 Year 3 Taxable income $ 95,000 $ 242,000 $ 465,000 Individual tax liability $ 23,750 $ 60,500 $ 116,250 125,000 $ 270,000 $ 520,000 Cash available for withdrawals before $ taxes Less: individual tax liability $ 23,750 $ 60,500 $ 116,250 101,250 $ 209,500 403,750 Equals: cash available for withdrawals $ after taxes Present value of cash flow