A start-up company, HEALTH V19 Unlimited, operates under ideal conditions of uncertainty. HEALTH V19 Unlimited produces a
Question:
A start-up company, HEALTH V19 Unlimited, operates under ideal conditions of uncertainty. HEALTH V19 Unlimited produces a single influenza vaccine, the demand for which will fall to zero at the end of 2 years. At that time, the highly specialized equipment used to produce the vaccine will be worthless. The required equipment was all purchased on January 1, 2020. This capital expenditure was financed by a bank loan of $220,000 and the balance by issuing capital stock. The loan of $220,000 will be repaid at the end of 2021.
HEALTH V19's operations are highly dependent upon how contagious the targeted strain of the virus is each year (2020 and 2021). For either year, the probabilities are 0.3 that the strain will be highly contagious, and 0.7 that it will be normally contagious. The state probabilities are independent over time.
HEALTH V19 Unlimited will pay $15,000 dividends at the end of each year of operation.
Interest on the bank loan is fixed at 4% throughout the term of the loan and is payable at the end of each year. HEALTH V19 Unlimited does not receive any cash flow from its product's sales until the end of each year. The cash flows for HEALTH V19's sales under each state realization are provided in the following payoff table:
Cash Flow Cash Flow
State Probability Cash Flow 2020 Cash Flow 2021
Highly contagious 0.3 $ 1,000,000 $ 900,000
Normally contagious 0.7 $ 310,000 $ 150,000
In 2020 the state realization is highly contagious and in 2021 normally contagious.
Required
- Provide, in good form, the balance sheet of HEALTH V19 Unlimited as of January 1, 2020 (year 0). Show all your calculations.
- Provide, in good form, the income statement of HEALTH V19 Unlimited for the year ended December 31, 2020 (year 1)
- Provide, in good form, the Balance Sheet of HEALTH V19 Unlimited as of December 31, 2020 (year 1)
- Provide, in good form, the income statement of HEALTH V19 Unlimited for the year ended December 31, 2021 (year 2)
- Provide, in good form, the Balance Sheet of HEALTH V19 Unlimited as of December 31, 2021 (year 2)
Expert Answer:
1 Balance Sheet of HEALTH V19 Unlimited as of January 1 2020 Year 0 Assets Cash0 Equipment 220000 Total Assets 220000 Liabilities Bank Loan 220000 Total Liabilities 220000 Equity Capital Stock 0 Retai... View the full answer
