Question

Seventh Canadian Edition by Kimmel, Weygandt, Kiese, Trenholm, Irvine, and Burnley Questions sa frend of yours who has worked at number of restaurants. He has always wanted to his own business and his dream can now come true because he won $1, 000,000 in a lot Where are two restaurants (one is small and one is large) currently operating that are available for purchase on January 1. Regardless of which one he buys, M e e t up a business that will December 3 year end. The business will be faced with his winnings from the lottery and the business then buy all of the assets of one of the restaurants. Mes not sure if memor us e the bu s should consist completely of or equity. He believes that the assets will $1,000,000 for the restaurant and $2.000.000 for the largesturant Revenues the first year are expected to be equal to the value of the purchased. Operating expenses are expected to be of , and the corporate income tax resca ted at 25 of incom before income tax. Interest on any loans (whether from or from the bank will be and any net med by the corporation will be paid out as dividends Mike needs your help in assessing the following three options: 1. bune formed as a corporation with $1,000,000 of common shares and no debt. The assets of the smallestrant are then purchased by the business 2. His business is formed as a corporation with 1 of common shares and a 1999.999 loan from M e The of the smal restaurant are the purchased by the business 1. Hobune is formed as a corporation with $1,000,000 of common shares and $1,000,000 loan from the bank. The sets of the large restaurant are then purchased your answer is correct. For each of the the options isted above, prepare the income ment you would expect to see for the Option 1 All equity Option 2 Option year of the com p etens Operating

Answer 1

Return on common share equity

option 1. = (net income/ common shares)*100

=$(187500/1000000)*100

= 18.8%

Option 2. = (net income/ common shares)*100

=$(127500/1)*100

= 12750000%

Option 3   = (net income/ common shares)*100

=$(315000/1000000)*100

= 31.5%

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