Business Math

From Homeworkwiki

Jump to: navigation, search
Benjamin O'Henry has owned and operated O'Henry's Data Services since its beginning ten years ago. From all appearances, the business has prospered. In the past few years, you have become friends with O'Henry and his wife. Recently, O'Henry mentioned that he has lost his zest for the business and would consider selling it for the right price. You are interested in buying this business, and you obtain its most recent monthly unadjusted trial balance which follows: O'Henry's Data Services Unadjusted Trial Balance November 30, 20XX
Cash.............................. $9,700
Accounts receivable................7,900
Prepaid expenses...................2,600
Furniture, fixtures, & equipment...151,300
Accumulated depreciation...........$15,600
Accounts payable...................3,800
Salary payable.....................
Unearned service revenue...........6,700
Benjamin O'Henry, capital..........137,400
Benjamin O'Henry, withdrawals......2,000
Service revenue....................14,300
Rent expense.......................
Salary expense.....................3,400
Utilities expense..................900
Depreciation expense...............
Supplies expense...................
Total..............................$177,800 $177,800
Revenues and expenses vary little from month to month, and November is a typical month. Your investigation reveals that the unadjusted trial balance does not include the effects of monthly revenues of $2,100 and monthly expenses totaling $2,750. If you were to buy O'Henry's Data Services, you would hire a manager who would require a monthly salary of $3,000. The most you would pay for the business is 20 times the monthly net income you could expect to earn from it. Compute this possible price. The least O'Henry will take for the business is his ending capital. Compute this amount. Under these conditions, how much should you offer O'Henry? Give your reason. Solution
This is not meant for a school project. Please, follow all rules, laws, and ethical standards. This is just to help you understand accounting principles.
Income Statement for Benjamin O'Henry
After Adjustment
Sales/service Revenue 14,300 16,400
Salary Expense 3,400
Utilities Expense 900
Total Expense 4,300 7,050
Net Income 10,000 9,350
Income Statement for Buyer
Sales Revenue 16,400
Salary Expense 3,400
Utilities Expense 900
Managers Salary 3,000
Total Expense 10,050 (7050+3000)
Net Income 6,350
Statement of Owners Equity
Beginning Benjamin O'Henry, capital 137,400
Add: Retained Earnings 9,350 (6350+3000)
Less: Withdrawals 2,000
Ending Capital 144,750
The sales revenue is modified for unrecorded revenues of $2,100 [as mentioned in the problem] and the expenses are also adjusted, according to the problem, for the unrecorded amount of $2,750.
The salary of manager at $3,000 per month is added in the income statement of the buyer.
The most one would pay for this is 20 times the monthly net income of $6350. That is 6,350 X 20 = $127,000.
However, the least seller will sell is at the ending capital which is $144,750 which is the owner’s equity (diff. between asset and liability).
Considering goodwill, fixed assets $144,750 is a good price.
One can look at the ROI (return on investment in 18 months, ideally when you want to get all your money back. ROI of 100% will be good).
ROI for $12700 is 6350*18/127000 is 90%
ROI for $144750 is 6350*18/144750 is 78% [not good]
Hence, unless there is a lot of goodwill involved and/or it is a strategic investment, one need to negotiate to have a price between the two numbers.
Personal tools
McAfee SECURE sites help keep you safe from identity theft, credit card fraud, spyware, spam, viruses and online scams