QC Ltd. operates under ideal conditions of uncertainty. On January 1, 2015, it purchased a capital asset that will last for two full years and then will be retired with zero salvage. The purchase price was financed with an issue of common stock. QC Ltd. plans to pay no dividends until after the end of 2016. The interest rate in the economy is 6%.
QC Ltd. is certain that net cash flow from its only asset will be $ 100 in 2015. However, net cash flow in 2016 is uncertain. Net cash flows in 2016 will be $ 200 (the high state) with objective probability 0.60 and $ 50 (the low state) with objective probability 0.40. All cash flows are received at their respective year- ends. At the end of year 2 it becomes known that the high state is realized.
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).