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
$130,000
10%
30,001100,000
18
100,001400,000
23
400,0015,000,000
30
Over 5,000,000
40
Personal Income Tax Schedule:
Taxable Income
Marginal Tax Rate
$15,000
8%
5,00120,000
12
20,00160,000
19
60,001180,000
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 Joe form a corporation or a sole proprietorship? Justify your answer.
Submit your answer, along with the Excel worksheet and your Word analysis
Grading Criteria
Maximum Points
Accurately calculated the net income earned and the taxes paid for each year accrued by Uncle Joe’s if the new venture is a corporation.
5
Accurately calculated the net income earned and the taxes paid for each year accrued by Uncle Joe’s if the new venture is a sole proprietorship.
5
Accurately calculated and interpreted the return on assets ratio, net profit margin ratio, and the asset intensity ratio.
5
Recommended a plan to finance the assets of the new venture.
10
Recommended the business form for the new venture.
10
Presented a structured document free of spelling and grammatical errors.
5
Properly cited sources using APA format.
5
Total:
45
