Capital Maintenance
Response to the following problem:
At the beginning of 1998, the Hill family organized the Hill Corporation and issued 8,000 shares of stock to family members for $20 per share. During 2001, it issued an additional 1,600 shares of stock for $25 per share to family members. The 9,600 shares were held by the family until the corporation was liquidated at the end of 2010. At that time, the corporate assets were sold for $600,000 and the $50,000 of corporate liabilities were paid off. The remainder was returned to stockholders. During the 13 years of operation, the corporation had a volatile operating life. It started out slowly but then increased its activities in later years. It had operated in several industry segments, being quite successful in some, not so successful in others. It had survived a major earthquake, but not without incurring significant losses. The corporation paid out dividends of $100,000 during its lifetime.
You are a member of the Hill family who has just inherited a sizable fortune from one of your relatives. Although you were quite young during the operating life of the Hill Corporation, you are considering establishing and investing in a new corporation that operates in some of the same lines of business, provided that the corporation would be profitable. You have just received your undergraduate accounting degree and upon investigation find that, with the exception of the preceding information, all the corporate accounting records were destroyed in a recent fire. You have been told that these records were sketchy at best, but that a capital maintenance approach to income measurement might yield some useful information.
Required
Compute the lifetime income of the Hill Corporation and comment on what additional information you would desire before making your investment decision.