Project -
1. You are the CEO for a company that makes a line of breakfast cereals. It has come to your attention that a small frozen foods manufacturing company is for sale which has substantial tax benefits. What questions would you want to ask before proceeding with an acquisition?
2. Your client is a biochemist who has discovered a technique to create a new biofuel. He estimates it will take him 2 years to make it economically feasible at a cost of $2,000,000. He expects he has an 80% chance at success; if so, he expects to be able to sell the patents for $10,000,000. Assume that all of the costs incurred were capitalized as costs of the patent, he has a combined federal and state tax rate of 30% and he has an expected rate of return of 8%. What is the present value of his expected payoff?
3. "Dog Delight must go" declared Marv Gold, owner and majority shareholder of the publicly traded PPI. PET Publications, Inc. was the industry leading publisher of magazines for pet owners.
"Our shareholders expect a 20% return on sales. All of our books - Bird World, Feline Fancy, Reptile World - clear the 20% hurdle. But Dog Delight only makes 10%. Sure, it generates $2 million in new operating losses per year, which partly offsets the $20 million of taxable income from the rest of the organization. I think we should sell it to Animal Publications."
Animal Publications was their major rival in the industry. It was comparable in sales and assets ($30 million and $150 million, respectively) but consisted of 20 smaller publications which did not have the brand recognition of PPI's four publications. Data on public 10K reports indicated the rival was paying taxes at a 34% rate.
As Chief Financial Officer, you decided to gather more facts before moving forward with the sale:
Feline Fancy was the "flagship" publication with a circulation double that of any of the other three magazines.
Advertising revenues have declined significantly over the last three years.
If the magazine is sold, it will sell for $30 million with a tax basis of $10 million in assets and a $20 million taxable gain will result.
If the magazine is spun off into a separate subsidiary, it can be operated or sold. If retained, PPI earnings per share (EPS) would go up to $50, while EPS for the subsidiary would be $20. If the subsidiary is sold, there would be a capital gain of $20 million.
What would you recommend to Mr. Gold?
4. Compare and contrast the S corporation and the limited liability company (LLC).
5. You are working as a marketing manager for a large corporation, and you have some marketing ideas related to the Internet, which are not of interest to your firm. Accordingly, you plan on starting your own weekend business as an internet marketing consultant. You want to do this on your own, and you foresee little outside capital needs in the near future. Should you continue to operate as a sole proprietor?
6. If an enterprise expects operating losses in the early years, is it always better to utilize a flow-through entity? Why or why not?
a. What entity would you recommend and why?
b. Would your answer change if the costs could be expensed (and deducted) over the 2 year period? Why or why not?