Jennifer Jones has decided to open a small business that will be supervised by a hired manager. With her current
Jones and the new manager have just finished drawing up a business plan. It projects the following operating results over the next five years:
Although Jones has substantial wealth, all of her capital will be tied up for several years. In addition, all of her after-tax annual income is committed to personal living expenses. Her pre-tax annual income is over $130,000. Jones has made an arrangement with her bank, which will provide an annual loan to cover any losses from the business. The bank will charge 10% interest. As cash flow is generated from the business, the loan will be repaid. She has yet to decide whether the business will be operated as a proprietorship or a separate corporation owned by her.
Determine the amount of the outstanding loan at the end of year 5 under both the corporate structure and the proprietorship structure. Assume that any bank loans will be obtained or repaid at the end of each year. Assume Jennifer lives in a province with a combined federal and provincial income tax rate of 45% in the top tax bracket.
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
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