Maurice Tutor
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Income Taxes and Ratios-Francine Delgado has developed a business plan for producing and selling a new hair care product that emits nutrients to the scalp when used. The product residues have been judged to be environmentally safe. Following are her projected partial financial statements for the first three years of operation of Hair Care Products Company. Francine, however, is unsure whether to organize her business as a proprietorship or a regular corporation.
| Â |
YEAR 1 |
YEAR 2 |
YEAR 3 |
|
Sales |
$200,000 |
$400,000 |
$1,800,000 |
|
Cost of goods sold |
100,000 |
200,000 |
800,000 |
|
Gross profit |
100,000 |
200,000 |
1,000,000 |
|
Operating expenses |
75,000 |
100,000 |
200,000 |
|
Depreciation |
4,000 |
8,000 |
20,000 |
|
Earnings before interest and taxes |
21,000 |
92,000 |
780,000 |
|
Interest |
1,000 |
2,000 |
4,000 |
|
Earnings before taxes |
20,000 |
90,000 |
776,000 |
|
Taxes |
? |
? |
? |
|
Net income |
? |
? |
? |
|
Cash and inventories |
$50,000 |
$100,000 |
$500,000 |
|
Building and equipment |
50,000 |
100,000 |
300,000 |
|
Total assets |
$100,000 |
$200,000 |
$800,000 |
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A. Use the tax rate schedules presented in this chapter to estimate the dollar amount of taxes that would have to be paid in each year by Hair Care Products Company if the venture is initially formed as a corporation. Also calculate the after-tax net income for each year.
B. Use the tax rate schedules presented in this chapter to estimate the dollar amount of taxes that would have to be paid in each year if Hair
Care Products Company is organized as a proprietorship and represents Francine’s only source of income, and if she is single. Also calculate the after-tax net income for each year.
C. Use ratios from Chapter 2 to calculate the return on assets model and its net profit margin and asset intensity ratios.
D. In order to grow sales, Hair Care Products will need to invest in assets to support sales growth. How might the venture’s assets be financed?
E. Would you recommend that Hair
Care Products Company be initially formed as a proprietorship or as a corporation? Why? Should Francine consider changing the form of business organization for Hair Care Products Company as the firm grows over time?