Debt or equity financing

Tom Thumb, a sole proprietor, is budgeting for the coming year. He will start the year with a $50,000 balance in his capital account. During the year Tom anticipates that he will withdraw $30,000 from the business for living expenses. However he anticipates a tax refund in May so he will contribute $20,000 to the business at that time. Tom predicts that the business income for the year will be $120,000.

What is the estimated balance in Tom’s capital account at the end of the year?

How much will Tom report on his Form 1040 for tax purposes?

Lisa Meuli is a sole proprietor offering cooking classes for clients throughout the region. She is considering starting a syndicated television cooking show for one year. She estimates that she will need $500,000 to start this venture. She believes the television show will earn her $50,000 this year. Lisa can borrow money at 8 percent annual interest. If the venture is successful Lisa will expand her television show to a national audience

. Should she use debt or equity financing for this one-year venture? Why?


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