economic valuation and dividend timing This is a continuation of problem 9 above.

a] Assume Ralph's discount rate is 9%. Prepare periodie ineome statements and end-of-period balanee sheets for Ralph using economic depreciation. (Hint: income in year 1 will oo .09(1,389.93) while assets at the end of year 1 will totaI1,515.02.)

b] Prepare a short paragraph explaining why the total income ealculated in la]

above is equal to the total income under eash basis or aecroal basis aecounting.

e] Prepare a short paragraph explaining what will happen to your ineome and balanee sheet ealeulations if Ralph builds up inventory during the early part of the story and subsequently sells it off.

d] Suppose, instead, that any eash on hand is held in an interest bearing account that pays 9% interest. (This implies the eash balanee at the end of year 2 would be 700(1.09) + 500 = 1,263.) How mueh would Ralph pay for this venture, assuming an interest rate of9%, at time t = O? Given this amount is paid, what would Ralph's economie income from the venture be in eaeh period?

e] Now suppose any cash on hand at the end of a period is paid out in dividends.

(So dividends are 700 at the end of year 1, 500 at the end of year 2, and 600 at the end of year 3.) How mueh would Ralphpay forthis venture? Given this amount is paid, what would Ralph's economie income from the venture be in each period?

How does this relate to the story in [d]?

AppendixLO1