ABC Ltd operates under ideal conditions of uncertainty. On January 1, 2020, ABC Ltd acquired an...

 

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ABC Ltd operates under ideal conditions of uncertainty. On January 1, 2020, ABC Ltd acquired an asset to be used in its operations. Its cash flows depend on the economic conditions. The asset will last three years, at which time its salvage value will be £100. ABC Ltd financed the asset purchase by issuing ordinary shares. In 2020, net cash flows will be £1400 if the economic conditions are favourable and £500 if they are unfavourable. In 2021, cash flows will be £2000 if the economic conditions are favourable, and £700 if they are unfavourable. In 2022, cash flows will be £2300 if the economic conditions are favourable, and £800 if they are unfavourable. Cash flows are received at year- end. In 2020, the probability that the economic conditions are favourable is 0.3 and 0.7 that they are unfavourable. In 2021 and 2022, the probability that the economic conditions are favourable is 0.4 and 0.6 that they are unfavourable. The interest rate in the economy is 10% in all three years. ABC Ltd pays a dividend of £200 at the end of 2020. In 2020, the economic conditions are favourable. Economic conditions for 2021 and 2022 are not yet known. Prepare a statement of financial position (balance sheet) as at the end of 2020 and a statement of income for 2020. ABC Ltd operates under ideal conditions of uncertainty. On January 1, 2020, ABC Ltd acquired an asset to be used in its operations. Its cash flows depend on the economic conditions. The asset will last three years, at which time its salvage value will be £100. ABC Ltd financed the asset purchase by issuing ordinary shares. In 2020, net cash flows will be £1400 if the economic conditions are favourable and £500 if they are unfavourable. In 2021, cash flows will be £2000 if the economic conditions are favourable, and £700 if they are unfavourable. In 2022, cash flows will be £2300 if the economic conditions are favourable, and £800 if they are unfavourable. Cash flows are received at year- end. In 2020, the probability that the economic conditions are favourable is 0.3 and 0.7 that they are unfavourable. In 2021 and 2022, the probability that the economic conditions are favourable is 0.4 and 0.6 that they are unfavourable. The interest rate in the economy is 10% in all three years. ABC Ltd pays a dividend of £200 at the end of 2020. In 2020, the economic conditions are favourable. Economic conditions for 2021 and 2022 are not yet known. Prepare a statement of financial position (balance sheet) as at the end of 2020 and a statement of income for 2020.

Answer rating: 100% (QA)

Amount in 2020 2021 2022 S Probability Income Probable Probability Income Inc... View the full answer