Petitioners' amended complaint alleged the following facts.^[1]On October 28, 1992, the town and AZCO entered into a contract for the construction of improvements to Petitioners' water distribution system. The contract called for AZCO to install new water mains, and to tie those water mains to existing water service lines which served residential properties in the town. Pursuant to the contract, AZCO agreed to furnish all labor, equipment, and materials for the connection of the existing water service lines with the new water mains. The contract contained two separate warranty provisions. Section 29.1 of the contract, titled "GUARANTEE," provided, "[AZCO] shall guarantee all materials and equipment furnished and WORK performed for a period of one (1) year from the date of SUBSTANTIAL COMPLETION. [AZCO] warrants and guarantees. . . that the completed system is free from all defects due to faulty materials or workmanship.. . ." In addition, section 3.3.1 of the "Special Conditions" attached to the contract, titled "MAINTENANCE AND GUARANTY," provided, "[AZCO] hereby guarantees that the entire work constructed by [it] under the contract will fully meet all requirements of the contract as to quality of workmanship and materials. . . . [AZCO] hereby agrees to make at [its] own expense, any repairs or replacement made necessary by defects in materials or workmanship supplied by [it] that become evident within one year after the date of final payment. . . ."

1. Is the net income of a year the money the company made that particular year or is it a

number whose significance is quite doubtful?

2. Is depreciation the loss of value of fixed assets?

3. The so-called "cash flow" (net income plus depreciation) is a flow of cash, but is it a

flow to the shareholders or to the company?

4. The dividend is the part of the net income that the company distributes to

shareholders. As the dividend represents real money, the net income is also real

money. Is that true?

5. The part of the net income that is not distributed to shareholders goes to reserves

(shareholders' equity). As dividends represent real money, reserves are also real

money. Is that true?

6. Does the shareholders' equity represent the savings a company has accumulated

through the years?

7. Is book value the best proxy to the value of the shares?

8. Is a valuation realized by a prestigious investment bank a scientifically approved

result which any investor could use as a reference?

9. Is it possible for a company with a positive net income and which does not distribute

dividends to find itself in suspension of payments?

2 - IESE Business School-University of Navarra

10. There are four ways a company can use the money it generates: a) buying other

companies or assets; b) reducing its debt; c) distribute it to shareholders, and d)

increasing its cash holdings. What other reasonable things can it do?