Question: The SFP of Karmax Ltd discloses the following assets

The SFP of Karmax Ltd. discloses the following assets:

Note 1 The long- term investment is an investment in the common shares of a company owned and operated by the two sons of Karmax’s major shareholder. The Karmax investment is 25% of the outstanding shares. The long- term investment is accounted for using the equity method. The sons’ company has never sold shares to a nonfamily investor, and the Karmax share-holder provided this estimate of value.
Note 2 Karmax holds patents on a successful consumer product, licensed to various manufacturers. Significant annual royalties are earned; the recorded SFP value consists of legal fees paid during patent infringement cases. The $ 10 million estimate of market value is based on discounted future cash flow.

Prepare a brief report that contains:
1. An analysis of the reliability of the various market value estimates as a good predictor of future cash flows; and
2. An assessment of the usefulness of the (primarily historical cost) SFP to:
a. A banker making a lending decision.
b. An investor evaluating return oninvestment.

  • CreatedFebruary 17, 2015
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