A C corporation is considering expanding its facilities with the purchase of an office for USD $400,000.
Question:
A C corporation is considering expanding its facilities with the purchase of an office for USD $400,000. Currently, the firm is majority owned by two individuals, with a joint shareholding of 51%, and a number of smaller investors. The company is managed by the two joint shareholders, Steve and Joe. To fund the expansion, management is considering the use of retained earnings, which would leave very little in the company's retained earnings account. However, Steve and Joe believe that they can rebuild the retained earnings by not paying themselves dividends in the ensuing three years. The following options are also being considered:
- Short-term borrowing at 10%.
- Selling off raw land held by the corporation. It could be sold for $400,000. It had originally been bought for $20,000 in 1987 by Steve, and transferred into the corporation at a fair market value of $100,000.
Required: Critically discuss the financing options using the SAVANT framework, and recommend the most appropriate form of financing.
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill