KLM, Inc. 2009 Statement of comprehensive income Net sales $3,685 Cost of goods sold 53.180 Depreciation $104 Earnings before interest and taxes S401 Interest paid $25 Taxable income $376 Taxes S128 Net income $248 Dividends paid S60 Addition to retained carnings S188 KLM Corporation Statement of financial positions as of December 31, 2008 and 2009 2008 2009 2008 2009 Cash $ 520 S 601 Accounts payable $ 621 $ 704 Accounts rec S 235 $ 219 Notes payable $ 333 S 272 Inventory $ 964 $ 799 Current liabilities $ 954 $ 976 Current assets $1.719 $1.619 Long-term debt $ 350 S 60 Net fixed assets $ 890 S 930 Common stock $ 800 S 820 Retained earnings $ 505 $ 693 Total assets $2,609 $2,549 Total liabilities and Owner's cquity S2,609 $2,549 a)Calculate CFFA according to both approaches. Show all the necessary steps with the calculations (50 marks) b) Discuss in detail the concepts of capital gains, CCA recapture and terminal loss in relation to the concept of depreciation and taxes (50 marks) 4. ROYAL company is considering whether to replace one of its devices with a newer model. The firm's three choices are: keep the exist model; design a new device with its resources; and purchase a new design. The market for these devices will be either "favorable" or "unfavorable" of the replacement model. The financial estimates are as follows: Keeping the old design will yield a profit of $9 million dollars. Designing the new one internally will yield $13 million if the market is " favorable," but a $6 million loss if the market is " unfavorable." Purchasing the new design will profit $7 million under" favorable " $4 million under " unfavorable." The company feels that the market has a 60% chance of being " favorable " and a 40% chance of being" unfavorable". Do nothing could be considered as a choice. A) Draw the decision tree. B) Calculate expected value for all courses of action. C) What action yields the highest expected value? (10) KLM, Inc. 2009 Statement of comprehensive income Net sales $3,685 Cost of goods sold 53.180 Depreciation $104 Earnings before interest and taxes S401 Interest paid $25 Taxable income $376 Taxes S128 Net income $248 Dividends paid S60 Addition to retained carnings S188 KLM Corporation Statement of financial positions as of December 31, 2008 and 2009 2008 2009 2008 2009 Cash $ 520 S 601 Accounts payable $ 621 $ 704 Accounts rec S 235 $ 219 Notes payable $ 333 S 272 Inventory $ 964 $ 799 Current liabilities $ 954 $ 976 Current assets $1.719 $1.619 Long-term debt $ 350 S 60 Net fixed assets $ 890 S 930 Common stock $ 800 S 820 Retained earnings $ 505 $ 693 Total assets $2,609 $2,549 Total liabilities and Owner's cquity S2,609 $2,549 a)Calculate CFFA according to both approaches. Show all the necessary steps with the calculations (50 marks) b) Discuss in detail the concepts of capital gains, CCA recapture and terminal loss in relation to the concept of depreciation and taxes (50 marks) 4. ROYAL company is considering whether to replace one of its devices with a newer model. The firm's three choices are: keep the exist model; design a new device with its resources; and purchase a new design. The market for these devices will be either "favorable" or "unfavorable" of the replacement model. The financial estimates are as follows: Keeping the old design will yield a profit of $9 million dollars. Designing the new one internally will yield $13 million if the market is " favorable," but a $6 million loss if the market is " unfavorable." Purchasing the new design will profit $7 million under" favorable " $4 million under " unfavorable." The company feels that the market has a 60% chance of being " favorable " and a 40% chance of being" unfavorable". Do nothing could be considered as a choice. A) Draw the decision tree. B) Calculate expected value for all courses of action. C) What action yields the highest expected value
