Assignment 3: Mid-Week Assignment: Analyze a Startup How would you select an organizational form for

Assignment
3: Mid-Week Assignment: Analyze a Startup
How would you select an
organizational form for a business? Think about this question as you read the
following scenario.
Joe Jones has created a
business plan for a new product. He is not certain whether to organize his
business as a regular corporation or a sole proprietorship. The following are
his forecasted partial financial statements for the first four years of
operation of the new venture named Uncle Joe’s.
Forecasted
partial Income Statement:

Year 1

Year 2

Year 3

Year 4

Sales

$15,000

$18,000

$23,400

$44,460

Cost of goods sold

8,000

10,000

15,000

21,000

Gross profit

7,000

8,000

8,400

23,460

Operating expenses

3,000

4,500

4,900

12,000

Interest

800

1,800

2,100

4,100

Earnings before taxes

2,200

2,700

2,800

7,900

Taxes

?

?

?

?

Net Income

?

?

?

?

Forecasted
Balance Sheet:

Year 1

Year 2

Year 3

Year 4

Cash and inventories

$30,000

$45,000

$67,500

$101,250

Building and equipment

25,000

32,500

42,250

54,925

Total assets

55,000

77,500

109,750

156,175

Corporate
Income Tax Schedule:

Taxable Income

Marginal Tax Rate

$1–30,000

10%

30,001–100,000

18

100,001–400,000

23

400,001–5,000,000

30

Over 5,000,000

40

Personal
Income Tax Schedule:

Taxable Income

Marginal Tax Rate

$1–5,000

8%

5,001–20,000

12

20,001–60,000

19

60,001–180,000

25

Over 180,000

33

Using the information on
Uncle Joes’ finances, answer the following questions:

Calculate the net income earned
and the taxes that would have to be paid in each year if the new venture
is formed as a corporation.

Calculate the net income earned
and the taxes that would have to be paid in each year if the new venture
is formed as a sole proprietorship.

Calculate the following ratios
for each year and interpret them:

Return on assets
Net profit margin
Asset intensity

Joe’s firm will need to acquire
assets in order to support the projected revenue growth. How would you
recommend Joe finance these assets?

Do you recommend that Joe form
a corporation or a sole proprietorship? Justify your answer.

Submit your answer,
along with the Excel worksheet and your Word analysis

Grading Criteria

Maximum Points

Accurately calculated
the net income earned and the taxes paid for each year accrued by Uncle Joe’s
if the new venture is a corporation.

5

Accurately calculated
the net income earned and the taxes paid for each year accrued by Uncle Joe’s
if the new venture is a sole proprietorship.

5

Accurately calculated
and interpreted the return on assets ratio, net profit margin ratio, and the
asset intensity ratio.

5

Recommended a plan to
finance the assets of the new venture.

10

Recommended the
business form for the new venture.

10

Presented a structured
document free of spelling and grammatical errors.

5

Properly cited sources
using APA format.

5

Total:

45