Question

Electro Ltd. has just commenced operations under ideal conditions of uncertainty. Its cash flows will depend crucially on the state of the economy. On January 1, 2015, the company acquired plant and equipment that will last two years, with zero salvage value. Electro financed the plant and equipment purchase by issuing common shares.
In 2015, net cash flows will be $ 900 if the state of the economy is good and $ 600 if it is poor. In 2016, cash flows will rise to $ 1,200 if the economy is good and remain at $ 600 if it is bad. Cash flows are received at year- end. In each year, the probability that the economy is good is 0.6. The interest rate in the economy is 3% in both years. Electro pays a dividend of $ 60 at the end of 2016.

Required
a. How much did QC Ltd. pay for its capital asset at the beginning of 2015? Show calculations.
b. Prepare, in good form, an income statement for QC Ltd. for the second year of operations— that is, 2016.
c. Prepare, in good form, a balance sheet for QC Ltd. at the end of 2016 (before any dividend payments).



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  • CreatedSeptember 09, 2014
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