Tutoring Concerns

question 18

Multiple Choice

Tutoring Concerns.Wally and Sally want to go into business together and plan on offering a tutoring service to high school and college students.Wally proposes that they share control of the business and split profits equally and not bother with a written agreement.Sally,however,is concerned about being able to pay their debts because they will have to rent tutoring space and purchase computers and supplies.She is also concerned about parents and students who may sue if the students' test scores do not improve.She tells Wally that she just bought a new boat and car,and that she does not want her assets to be in jeopardy.She tells Wally that they should form a corporation to shield their personal assets.Wally,however,says their personal assets are not in danger with his proposal because they are a business and that,furthermore,forming a corporation would likely result in double taxation.Is Wally correct that forming a corporation would likely result in double taxation?

• A)Yes,because the corporation would be required to pay tax on its profits,and the shareholders would also be required to pay taxes on dividends.
• B)No,Wally is incorrect because all businesses are taxed in the same manner.
• C)No,Wally is incorrect but only because the law involving taxation of corporations does not apply until there are at least 10 shareholders.
• D)No,Wally is incorrect but only because the law involving taxation of corporations does not apply until there are at least 75 shareholders.
• E)Yes,Wally is correct but only because his proposal does not involve a writing and the filing of paperwork with the secretary of their state.

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Definitions:

WACC

WACC stands for Weighted Average Cost of Capital, a calculation used to assess the average cost of a company's financing sources including equity, debt, and other securities.

Optimal Capital Structure

The best mix of debt, equity, and other financings that maximizes a company's market value while minimizing its cost of capital.

Discount Rate

The rate of interest utilized to calculate the current value of future cash flows within discounted cash flow analysis.

Cost of Capital

A company's expense for acquiring funds and capital, calculated as a weighted average of debt and equity costs.