05 Jan Jennifer Jones has decided to open a small busines
Jennifer Jones has decided to open a small business that will be supervised by a hired manager. With her current cash resources, she will be able to acquire the necessary assets for the business and provide basic working capital. However, any losses that occur will have to be funded by an infusion of additional capital. 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. Required: 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.
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