Service Revenue (14,300 2,100) 16,400
Less Operating expenses
Salary Expense 3,400
Utilities Expense 900
Adjusting Expenses 2,750
Manager Remuneration 3,000 10,050
Expected Net Income 6,350
Maximum Purchase Price (6,350 x 20) 127,000
2. Income Statement for November 2009
Service Revenue 16,400
Less Operating expenses
Salary Expense 3,400
Utilities Expense 900
Adjusting Expenses 2,750 7,050
Net Income 9,350
Statement of Retained Earnings
Benjamin OHenry, Capital at 1 Nov. 137,400
Net Income for November 9,350
Benjamin OHenry, Withdrawals (2,000)
Benjamin OHenry, Capital at 30 Nov. 144,750
Minimum Selling Price for Henry 144,750
Optimal Price to be Offered to Henry
The maximum price that the buyer is willing to offer to the seller is 17,750 lower than the minimum price acceptable for the seller. Hence, if both parties abide with such figures, the transaction will not take place. From the envisaged income statement, a very good profitability level of 76,200 per year is expected. If such trend continues, the seller will be able to cover the initial purchase price of 144,750 in 1 year 10 months (76,200-68,550)76,200. This is a very quick payback period, which further highlights the desirability for the investment. Thus the buyer may consider increasing the maximum purchase price to combine with that of Henry so that the transaction takes place.
An important element that ought to be included in this examination is the sources of finance available for the additional 17,750 that the buyer needs to meet OHenrys minimum selling price. The buyer may be limited for cash and not able to meet such additional cash outflow. In instances of capital rationing other sources of finance can be relied upon. For instance the buyer may attain a loan from a bank to cover such additional capital expenditure. Another solution may be the involvement of Benjamin as a sleeping partner in the organization, where a share of profits is given. Therefore, it is advisable that the buyer tries to meet the sellers minimum selling price in light that the business looks financially prosperous. In case of finance problems solutions like the aforesaid should be relied upon.
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