A North Dakota telecommunication company sold “the contractual right to a 5-year supply of transmission capacity” to another telecommunication company in an all-cash transaction. The price was deliberately set above fair market value. The buyer, located in San Jose, California, in turn sold an equivalent amount of “5-year transmission capacity” to the North Dakota telecommunications company at an equally inflated price in an all-cash transaction. Answer all of the questions below.

1. Does this affect the North Dakota companies’ net cash flow?
2. Does it affect the North Dakota company’s reported assets?
3. Does it affect the North Dakota company’s net income in the year of sale?
4. Does it affect the North Dakota company’s long-term profitability?
5. Why do you think that this company entered into this transaction?
6. Would you describe this transaction as a “round-trip” transaction? Why or why not?

Answer rating: 100% (QA)

1 Yes it will definitely affect the North Dakota companys net cash flow Because cash flow is always ... View the full answer