Please have a look at the attached question and its answer. I was wondering, why is the value of the company still $600k after paying out the salaries? My understanding is that the salary ($80k each person) is from the cash in the company, so after paying the salaries, the cash flow in the company will decrease by $160k, so the new value will be $460k rather than $600k. So is there a typo on the answer?

Question 5 Now suppose you are the 50% owner of a successful small business valued at $600,000 from which you and your partner are both currently drawing a salary of $80k. Last year, the company's total profit was $60k and you expect next year's revenue and expenses to be the same (except for changes in salary). You and your partner are discussing what to do with prots next year, having identied the following three options: (a) Increase both of your salaries to $100k for next year and pay the rest out in dividends (b) Maintain salary as-is but pay all prots out in dividends (0) Increase both salaries to $90k and pay out 50% of prots as dividends Ignoring taxes, which option most increases your wealth? Justify your answer. Question 5 Solution The three options are identical. In (a), you will take home $100k. Since you and your partner are both taking $20k more in salary, the prot will decrease by $40k to $20k. Your half of that remaining profit is $10k, which you will receive in dividends. Net result: you get $100k salary plus $10k dividend and the company is still worth $600k. In (b), the salaries do not change so the company makes a $60k prot again. You receive your salary of $80k plus a dividend of $30k (50% of total profit). The net benet to you is $110k, and the company is still worth $600k. In (c), the prot will decrease by $20k since salary expense increases by $20k ($10k each), leaving $40k net profit for the company. Of that, 50% ($20k) is paid out in dividends and $20k is retained, increasing the company's value to $620k. Result is you receive $90k salary, $10k of dividends (50% of $20k), and $10k (50% of $20k = $620k$600k) in increased value in the company. In summary, if the impact of taxes is ignored, it does not matter to your net wealth whether you draw a salary, pay a dividend, or retain earnings within the company that you own. Obviously on a practical level it is necessary to pay a salary andlor dividends so you have cash with which to pay your regular living expenses