Negotiating the Sale of a Business

Helen Knight is attempting to sell her business to Chris Bosh. The company has assets of $1,800,000, liabilities of $1,600,000, and owner's equity of $200,000. Both parties agree that the proper rate of return to expect is 12 percent; however, they differ on other assumptions. Knight believes that the business will generate at least $200,000 per year of cash flows for 20 years. Bosh thinks that $160,000 in cash flows per year is more reasonable and that only 10 years in the future should be considered.

Note: Table 2 on present value may be used where appropriate to solve this problem.

Determine the range for negotiation by computing the present value of Knight's offer to sell and of Bosh's offer to buy.

Knight's offer to sell

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Russell Publishing sells subscriptions for a variety of popular magazines. In October, Year 1, Russell Publishing sold and received payment for 21,960 annual subscriptions at a price of $63 per subscription. These new subscribers began receiving monthly issues in November, Year 1. In addition, the business had taxable income of $458,900 during the first calendar quarter of Year 2. The federal tax rate is 40%. Russell Publishing will make a quarterly tax payment on April 7, Year 2.

On March 31, Russell Publishing owed suppliers a total of $356,645 for merchandise and supplies purchased and owed employees $89,200 for unpaid wages. Prepare the current liabilities section of Russell Publishing's balance sheet on March 31, Year 2.

Russell Publishing Balance Sheet March 31, Year 2
Current Liabilities
Accounts payable	$
Wages payable	$
Federal income taxes payable	$
Advances on magazine subscriptions	$
Total current liabilities	$

Determining an Advance Payment

Katie Davis is contemplating paying five years' rent in advance. Her annual rent is $12,600.

Note: The following Table 2 on present value may be used where appropriate to solve this problem.

Calculate the single sum that would have to be paid now for the advance rent. Assume compound interest of 8 percent. Round your answer to the nearest cent.

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Deferred Payment

Alligood Equipment Corporation sold a precision tool machine with computer controls to Kaui Corporation for $400,000 on January 2 and agreed to take payment nine months later on October 2. Assume that the prevailing annual interest rate for such a transaction is 16 percent compounded quarterly.

Note: The following Table on present value may be used where appropriate to solve this problem.

What is the actual sale (purchase) price of the machine tool?
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