Fixed Accounting

Assignment 1: Client Letter

Due Week 2 and worth 150 points

Imagine that you are a Certified Public Accountant (CPA) with a new client who needs an opinion on the most advantageous capital structure of a new corporation. Your client formed the corporation in question to provide technology to the medical profession to facilitate compliance with the Health Insurance Portability and Accountability Act (HIPAA). Your client is very excited because of the ability to secure several significant contracts with sufficient capital.

Use the Internet and Strayer databases to research the advantages and disadvantages of debt for capital formation versus equity for capital formation of a corporation. Prepare a formal letter to the client using the six (6) step tax research process in Chapter 1 and demonstrated in Appendix A of your textbook as a guide.

Write a one to two (1-2) page letter in which you:

1.    Compare the tax advantages of debt versus equity capital formation of the corporation for the client.

2.    Recommend to the client whether he / she should use debt or equity for capital formation of the new corporation, based on your research. Provide a rationale for the response.

3.    Use the six (6) step tax research process, located in Chapter 1 and demonstrated in Appendix A of the textbook, to record your research for communications to the client.

Your assignment must follow these formatting requirements:

·         Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.

·         Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length

Running head: CLIENT LETTER 1

CLIENT LETTER 4

 

 

 

 

 

Client Letter

Karen

ACC 565

Organizational Tax Research and Planning

November 28, 2013

Dr. Michael Anyanwu

Professor

 

 

 

Richardson Accounting

143 Karen Ct

North Charleston, SC 29405

 

October 29, 2013

Keon Brown, Chief Financial Officer

Brown Industries

9876 State St.

Charleston, SC 29425

 

Dear Mr. Brown:

 

It is a pleasure to be able to address you today in reference to your new company, Brown Industries. As there is a drastic need for ways to ensure compliance with the Health Insurance Portability and Accountability Act (HIPAA) in the medical profession, I am excited to see the technology that you incorporate.

 

You contacted me on October 1, 2013 inquiring if it would be more advantageous to use debt or equity for capital formation of the new corporation. While both equity and debt capital have their own advantaged and disadvantages, debt capital holds the biggest tax advantages for you company.

 

In reaching this conclusion, research was performed on both debt and equity capital. Specific attention was paid to the tax advantages and disadvantages of each. Also taken into consideration was any information disclosed to us about your company and its operations.

 

The interest paid on debt capital is tax exempt; hence, the company’s loan costs are lowered. Creditors have no say in the conduct of the business, so by issuing debt capital, the company does not dilute the ownership rights of the shareholders. Also, as the interest rates are predetermined, the management is able to budget for the payments. During the initial years of the company’s formation, it is able to raise equity capital more easily than debt capital. The company is not, at any time, obligated to repay the money as long as it operates, and the company pays dividends only if it makes profits. However, tax payments are required on dividends.

 

Another consideration is that both instruments, debt and equity, are viewed and evaluated by credit rating agencies. Once all of the volatility and safety features related to each capital type have been dissected, the credit rating agency will make recommendations of where to invest. In this case, they agree that debt capital is currently the best option.

 

Conclusion

 

To re-iterate what has previously been said, according to the research conducted by Richardson Accounting and a credit rating agency on behalf of Brown Industries, it has been determined that currently debt capital is the best financing option due to tax advantages. Since this may not be the case in the future, it is suggested that research be conducted each time that additional capital is needed in order to verify which type of capital would best suit the company’s needs at that time.

 

 

If you have any questions concerning this recommendation, please call me via phone @ 843-987-6543 or email at Richardson@richardsonsaccounting.com.

 

 

 

 

Sincerely,

 

 

Karen Richardson

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

 

Raghavendra, P. (2010, December 3). Comparison of Issue Debt vs. Equity | eHow. eHow. Retrieved from http://www.ehow.com/about_7593181_comparison-issue-debt-vs-equity.html

Running head:

 

CLIENT LETTER

 

 

 

 

1

 

 

 

 

 

 

 

 

Client Letter

 

Karen

 

ACC 565

 

Organizational Tax Research and Planning

 

November 28, 2013

 

Dr. Michael Anyanwu

 

Professor

 
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