Problem 1-10 (LO. 4, 5)

Ashley runs a small business in Boulder, Colorado, that makessnow skis. She expects the business to grow substantially over thenext three years. Because she is concerned about product liabilityand is planning to take the company public in year 2, she currentlyis considering incorporating the business. Pertinent financial dataare 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 incometax rate to be 25% over the three years before any profits from thebusiness are considered. Her after-tax cost of capital is 10%, andthe 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 youranswers to the nearest dollar.

a. Considering only these data, compute thepresent value of the future cash flows for the three-year period,assuming that Ashley incorporates the business and pays allafter-tax income as dividends (for Ashley’s dividends that qualifyfor the 15% rate).

	Year1	Year2	Year3
Taxable Income	?	?	?
Corporate tax liability	?	?	?
Cash available for dividends beforetaxes	?	?	?
Less: corporate tax liability	?	?	?
Equals: cash available for dividendsaftertaxes	?	?	?
Less: tax on dividend at 15% rate	?	?	?
After-tax cash flow	?	?	?
Present value of cash flow	?	?	?

Considering only these data, compute the present value of thefuture cash flows for the period, assuming that Ashley continues tooperate the business as a sole proprietorship.

	Year 1			Year 2			Year 3
Taxable income	?			?			?
Individual tax liability	?			?			?
Cash available for withdrawals beforetaxes	?			?			?
Less: individual tax liability	?			?			?
Equals: cash available forwithdrawals after taxes	?			?			?
Present value of cash flow	?			?			?