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Expand Your Critical Thinking 11-3 (Part Level Submission) is a friend of yours who has worked at a number of restaurants. He has always wanted to own his own business and his dream can now come true because he just won $1,500,000 in a lottery. There are two restaurants (one is small and one is large) currently operating that are available for purchase on January 1. Regardless of which one he buys, Jack will set up a business that will have a December 31 year end. The business will be financed with his winnings from the lottery and the business will then buy all of the assets of one of the two restaurants. Jack is not sure if the money he puts into the business should consist completely of debt or equity. He believes that the assets will cost $1,500,000 for the small restaurant and $3,000,000 for the large restaurant. Revenues for the first year are expected to be equal to the value of the assets purchased. Operating expenses are expected to be 70% of sales, and the corporate income tax rate is calculated at 25% of income before income tax. Interest on any loans (whether from Jack or from the bank) will be 7% and any net income earned by the corporation will be paid out as dividends. Jack needs your help in assessing the following three options: . His business is formed as a corporation with $1,500,000 of common shares and no debt. The assets of the small restaurant are then purchased by the business 2. His business is formed as a corporation with $1 of common shares and a $1,499,999 loan from Jack. The assets of the small restaurant are then purchased by the business. His business is formed as a corporation with $1,500,000 of common shares and a $1,500,000 loan from the bank. The assets of the large restaurant are then purchased L] Your answer is correct. For each of the three options listed above, prepare the income statement that you would expect t Option 1 All equity Option 2 All debt Option 3 Debt & equity Revenue 1500000 1500000 Operating Expenses Income from Operations Interest Expense 1050000 1050000 2100000 450000 450000 900000 0 105000 105000 Income Before Income Tax : 450000 345000 795000 Income Tax Expense 112500 86250 198750 Net income 337500 258750 596250 Y (c) Your answer is partialy correct. Try again. Based on your results in part (a) above, how much cash (before personal income tax) would Jack have personally (not in the corporation) under each option if all of the net income earned by the company is paid out to him at the end of the year as a dividend? Option 1 Option 2 Option 3 Cash 3375 596250

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