Reference no: EM132957917

Problem - Asif runs a successful advertising agency from offices in Berlin. The business did not need much capital to get started but Asif is now keen to diversify the business from producing just newspaper and magazine adverts into creating television and radio adverts. To fund this, the business will need to raise a significant amount of capital, €900,000, and Asif has been advised that the best way to start this process is to convert the business into a limited company.

REQUIRED -

a) Explain what is meant by limited liability.

b) Describe two advantages to Asif of forming a limited company.

c) If Asif issues 400,000 ordinary shares of €1 each and raises the remainder by means of a long-term loan carrying interest at 6%, what will the annual interest obligation of the company be?

d) Forecast statements of profit or loss prepared for the company show that once the business has expanded, expected profits will be:

Year 1: Profit before interest €30,000

Year 2: Profit before interest €42,000

Year 3: Profit before interest €65,000

Year 4: Profit before interest €88,000

What would be the profits available to each ordinary shareholder in each of the years 1 to 4? (Ignore taxation.)

e) Comment on your findings in part (d).