Question: P Ltd operates under ideal conditions of certainty It has

P Ltd. operates under ideal conditions of certainty. It has just bought a capital asset for $ 3,100, which will generate $ 1,210 cash flow at the end of one year and $ 2,000 at the end of the second year. At that time, the asset will be useless in operations and P Ltd. plans to go out of business. The asset will have a known salvage value of $ 420 at the end of the second year. The interest rate in the economy is constant at 10% per annum.
P Ltd. finances the asset by issuing $ 605 par value of 12% coupon bonds to yield 10%. Interest is payable at the end of the first and second years, at which time the bonds mature. The balance of the cost of the asset is financed by the issuance of common shares.

a. Prepare the present value- based balance sheet at the end of the first year and an income statement for the year. P Ltd. plans to pay no dividends in this year.
b. Give two reasons why ideal conditions are unlikely to hold.
c. If ideal conditions do not hold, but present value- based financial statements are prepared anyway, is net income likely to be the same as you calculated in part a? Explain why or why not.

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  • CreatedSeptember 09, 2014
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