Question

-hw/page 1 of 3) Q Search Ashley runs a small business in Boulder, Colorado, that makes snow skis. She expects the business to grow substantially over the next three years. Because she is concerned about product liability and is planning to take the company public in year 2, she currently is considering incorporating the business. Pertinent financial data are as follows Year 1 Year 2 Year 3 $150,000 $320,000 $600,000 5,000 8,000 15,000 Deductible cash expenses 30,000 58,000 95,000 25,000 20,000 40,000 Sales revenue Tax-free interest income Tax depreciation Ashley expects her combined Federal and state marginal income tax rate to be 25% over the three years before any profits from the business are considered. Her after-tax cost of capital is 10%, and the 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 your answers to the nearest dollar. a. Considering only these data, compute the present value of the future cash flows for the three-year period, assuming that Ashley incorporates the business and pays all after-tax income as dividends (for Ashley's dividends that qualify for the 15% rate) Year 1 95,00o 242,000465,000 13,750 X22,250 113,900 x Year 2 Year 3 Taxable income Corporate tax liability Cash available for dividends before taxes 125,000 Less: corporate tax liability Equals: cash available for dividends after taxes $ 66,750 Less: tax on dividend at 15% rate After-tax cash flow Present value of cash flow 270,00o 520,000 $20,5s077,630158,100 $ 192,370 X $ 361,900 X 15,66828,856 $54,285 * 88,783 x163,515 307,615 x 22,323130,354218,960 x

Answer 1