Loretta Plans to Start a Small Business, Which Will Operate

question 5

Multiple Choice

Loretta plans to start a small business, which will operate as a corporation. In year 0, she expects the corporation to generate a loss of $100,000. Subsequently, she expects the corporation to be profitable, and projects profit of $150,000 in year 1, and $250,000 in year 2. Using Appendix A and a 10% discount rate, calculate the present value of expected tax savings and costs on the business earnings for the first 3 years of operations if the business does not make an S corporation election.

• A) $52,910 total tax cost
• B) $88,250 total tax cost
• C) $94,350 total tax cost
• D) $118,800 total tax cost

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Definitions:

High Risk Firms

Companies that operate in industries or environments with a high level of uncertainty and volatility, posing greater risks to investors.

Merger Analysis

The process of evaluating the financial, strategic, and operational implications of combining two or more companies into a single entity.

Capital Budgeting

The process of evaluating and selecting long-term investments that are in line with the goal of investor's wealth maximization.

Spinoff

A spinoff occurs when a company creates an independent entity by detaching a portion of its business, assets, or division, distributing shares of the new entity to its current shareholders.