Lee Nicholas has been the principal stockholder and has operated World.com Advertising, Inc., since its beginning 10 years ago. The company has prospered. Recently, Nicholas mentioned that he would sell the business for the right price. Assume that you are interested in buying World.com Advertising. You obtain the most recent monthly trial balance, which follows. Revenues and expenses vary little from month to month, and January is a typical month. The trial balance shown is a preliminary or unadjusted trial balance. The controller informs you that the necessary accrual adjustments should include revenues of $3,800 and expenses of $1,100. Also, if you were to buy World.com Advertising, you would hire a manager so you could devote your time to other duties. Assume that this person would require a monthly salary of $5,000.
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WORLD.COM ADVERTISING, INC. |
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Balance |
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Accounts Title |
Debit |
Credit |
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Cash |
$9,700 |
|
|
Accounts receivable |
14,100 |
|
|
Prepaid expenses |
2,600 |
|
|
Building |
221,300 |
|
|
Accumulated depreciation |
|
$68,600 |
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Accounts payable |
|
13,000 |
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Salary Payable |
|
|
|
Unearned service revenue |
|
56,700 |
|
Common Stock |
|
50,000 |
|
Retained earning |
3,400 |
60,400 |
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Dividends |
9000 |
|
|
Service revenue |
|
12,300 |
|
Rent expense |
|
|
|
Salary expense |
3400 |
|
|
Utilities expenses |
900 |
|
|
Depreciation expenses |
|
|
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Supplies expenses |
|
|
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Total |
$261,000 |
$261,000 |
Requirements
1. Assume that 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.
2. Nicholas states the least he will take for the business is an amount equal to the business’s stockholders’ equity balance on January 31. Compute this amount.
3. Under these conditions, how much should you offer Nicholas? Give your reason.