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 their product liability and is planning to take the company public in 2014, she is currently considering incorporating the business. Financial data are as follows.
2013 2014 2015
Sales Revenue 150,000 320,000 600,000
Tax-Free Interest Income 5000 8000 15,000
Deductible cash expenses 30,000 58,000 95,000
Tax depreciation 25,000 20,000 40,000
a) Compute the present value of the future cash flows for 2013-2015 assuming that Ashley incorporates the business and pays all after-tax income as dividends (for Ashleys dividends that qualify for the 15% rate)
b) Compute the present value of the future cash flows for 2013 to 2015 assuming that Ashley continues to operate the business as a sole proprietorship
c) Should Ashley incorporate the business this year?
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