CKG Ltd. is a Canadian-controlled private corporation owned equally by Mr. and Mrs. Ducharme. The company has been profitable for several years, largely because of the efforts of the Ducharmes, who both participate actively in the management of the business.

The current year’s business profit, before taxes, is expected to be $540,000. This is a record high for the company and is $50,000 higher than in the previous year. Over the past two years, the company has built up substantial cash reserves. The Ducharmes are considering using the funds as follows:

A competitor wants to sell out and has offered to sell its shares to CKG for $500,000.

The following summary of the competitor’s most recent operating results was provided to the Ducharmes:

Sales …………………………………………	$850,000
Cost of sales …………………………………………	378,000
Gross profit …………………………………………	472,000
Operating expenses …………………………………………	370,000
Income …………………………………………	102,000
Income taxes…………………………………………	(15,300)
Net income …………………………………………	$ 86,700

• The Ducharmes recently agreed to purchase a large new personal residence, which they will take possession of in two months. They have not yet sold their existing home, but when they do, they will need an additional $100,000 to complete the purchase. The Ducharmes feel that CKG has sufficient resources to fund both of the above transactions. They are particularly interested in purchasing the competitor’s business and feel that the purchase price of $500,000 is reasonable, as it will provide an after-tax return on investment of 17% ($86,000 ÷ $500,000).

Both Ducharmes are paid an annual salary of $130,000.

Required:

1. Comment on the purchase of the competitor’s business by CKG.

2. What methods should CKG use to provide funds to the Ducharmes so that they can meet their cash needs in acquiring their new home? Explain.