Question 2.1 (Total: 20 marks, -4 per error)

Assume that Crusher Co. has several minor lawsuits outstanding. To determine the amount of liability to recognize on the statement of financial position, Crusher decides to use expected cash flow techniques. Based on discussions with their lawyers, Crusher has developed the following cash flow estimates, and related probabilities:

Year	Cash Flow Estimate	Probability Assessment
2021	$2,300	30%
	$4,500	45%
	$8,200	25%
2022	$3,200	20%
	$5,400	50%
	$7,100	30%

Required:

1) Based on these estimates, and assuming a risk-free rate of 5%, what is the present value of expected cash flows that Crusher should record on their statement of financial position for 2021?

Question 2.2 (Total: 15 marks, -5 per error)

Pickle Company issues a six-year, 8% mortgage note on January 1, 2020, to obtain financing for new equipment. The terms provide for semi-annual instalment payments of $112,825.

Required:

1) What were the cash proceeds received from the issue of the note? You can use the PV Table located in your textbook, a financial calculator or Excel function to solve this question.

Question 2.3 (Total: 27 marks; 3 marks each)

Financial information follows for four different companies:

	Apple Inc.	Banana Corp.	Cherry Ltd.	Dragon Fruit Ltd.
Sales Revenue	$102,000	(c)<="" td="" style="box-sizing: inherit;">	$144,000	$122,000
Sales Returns and Allowances	(a)	$8,000	12,000	9,000
Net Sales Revenue	74,000	110,000	132,000	(g)
Beginning Inventory	23,000	(d)	40,000	24,000
Purchases	60,000	105,000	(e)	99,000
Returns and Allowances	6,000	10,000	8,000	(h)
Ending Inventory	(b)	48,000	30,000	28,000
Cost of Goods Sold	64,000	82,000	(f)	72,000
Gross Profit	10,000	29,000	18,000	(i)

Required

1. Determine the missing amounts for parts (a) to (i) in the table. Show all calculations after that.

Question 2.4 (Total: 38 marks)

Thor Inc. owns 25% of the common shares of Loki Corp. The other 75% of the shares are owned by the Loki family. Thor acquired the shares eight years ago through a financing transaction. Each year, Thor has received a dividend from Loki. Loki has been in business for 60 years and continues to have strong operations and cash flows. Thor must determine the fair value of this investment at its year end. Since there is no market on which the shares are traded, Thor must use a discounted cash flow model to determine fair value.

Thor management intends to hold the shares for five more years, at which time they will sell the shares to the Loki family under an existing agreement for $1 million. There is no uncertainty in this amount. Management expects to receive dividends of $80,000 for each of the five years, although there is a 20% chance that dividends could be $50,000 each year. The risk-free rate is 4% and the risk-adjusted rate is 6%.

Required

1. Identify some of the items Thor will need to consider in determining the fair value of the investment.

2. Calculate the fair value of the investment in Loki using the traditional approach with factor Tables PV.1 and PV.2 (found in your textbook)

3. Calculate the fair value of the investment using the expected cash flow approach.

4. In this case, which discounted cash flow model is the best? Why?