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(solution) Analyze a Startup


How would you select an organizational form for a business? Think about this question as you read the following scenario.Joe Jones has created a business plan for a new product. He is not certain whether to organize his business as a regular corporation or a sole proprietorship. The following are his forecasted partial financial statements for the first four years of operation of the new venture named Uncle Joe's Document Preview: Assignment 3: Mid-Week Assignment: Analyze a Startup How would you select an organizational form for a business? Think about this question as you read the following scenario. Joe Jones has created a business plan for a new product. He is not certain whether to organize his business as a regular corporation or a sole proprietorship. The following are his forecasted partial financial statements for the first four years of operation of the new venture named Uncle Joe's. Forecasted partial Income Statement:   Year 1 Year 2 Year 3 Year 4 Sales $15,000 $18,000 $23,400 $44,460 Cost of goods sold 8,000 10,000 15,000 21,000 Gross profit 7,000 8,000 8,400 23,460 Operating expenses 3,000 4,500 4,900 12,000 Interest 800 1,800 2,100 4,100 Earnings before taxes 2,200 2,700 2,800 7,900 Taxes ? ? ? ? Net Income ? ? ? ? Forecasted Balance Sheet:   Year 1 Year 2 Year 3 Year 4 Cash and inventories $30,000 $45,000 $67,500 $101,250 Building and equipment 25,000 32,500 42,250 54,925 Total assets 55,000 77,500 109,750 156,175 Corporate Income Tax Schedule: Taxable Income Marginal Tax Rate $1–30,000 10% 30,001–100,000 18 100,001–400,000 23 400,001–5,000,000 30 Over 5,000,000 40 Personal Income Tax Schedule: Taxable Income Marginal Tax Rate $1–5,000 8% 5,001–20,000 12 20,001–60,000 19 60,001–180,000 25 Over 180,000 33 Using the information on Uncle Joes' finances, answer the following questions: Calculate the net income earned and the taxes that would have to be paid in each year if the new venture is formed as a corporation. Calculate the net income earned and the taxes that would have to be paid in each year if the new venture is formed as a sole proprietorship. Calculate the following ratios for each year and interpret them: Return on assets Net profit margin Asset intensity Joe's firm will need to acquire assets in order to support the projected revenue growth. How would you recommend Joe finance these assets? Do you recommend that...

 


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