Question
Southern Belle plans to manufacture boat motors. Sales will be dependent on the length of the summer season. Southern Belle operates under ideal conditions of
Southern Belle plans to manufacture boat motors. Sales will be dependent on the length of the summer season. Southern Belle operates under ideal conditions of uncertainty.
On January 1, 2020, Southern Belle started operations by acquiring the necessary equipment which will last 2 years at which time there will be no salvage value. Southern Belle financed the equipment purchase through a $950,000 bank loan at a 8% interest rate and the balance was financed through the issuance of common shares.
Southern Belles annual net cash flows will be $1,350,000 if the summer remains hot for 12 weeks and $600,000 if the summer is warm for 6 weeks. Assume that the cash flows are received at year-end. In each year the objective probability that the summer is hot for 12 weeks is 65% and warm for 6 weeks 35%. The interest rate in the economy is 8% in both years.
Southern Belle will pay a dividend of $110,000 at the end of each year of operations.
Assume that in 2020 that the season is hot for 12 weeks.
Southern Belle plans to manufacture boat motors. Sales will be dependent on the length of the summer season. Southern Belle operates under ideal conditions of uncertainty.
On January 1, 2020, Southern Belle started operations by acquiring the necessary equipment which will last 2 years at which time there will be no salvage value. Southern Belle financed the equipment purchase through a $950,000 bank loan at a 8% interest rate and the balance was financed through the issuance of common shares.
Southern Belles annual net cash flows will be $1,350,000 if the summer remains hot for 12 weeks and $600,000 if the summer is warm for 6 weeks. Assume that the cash flows are received at year-end. In each year the objective probability that the summer is hot for 12 weeks is 65% and warm for 6 weeks 35%. The interest rate in the economy is 8% in both years.
Southern Belle will pay a dividend of $110,000 at the end of each year of operations.
Assume that in 2020 that the season is hot for 12 weeks.
Answer the following Parts:-
Part A
Calculate the present value of the equipment on January 1, 2020. The present value is
Part B
Determine the following items that would appear on the December 31, 2020 financial statements:
Cash -
Equipment -
Total assets -
Common shares -
Retained earnings -
Net income/loss -
Part C
Assuming that Southern Belle paid the present value for the equipment, calculate the net income/loss for the year ended December 31, 2021 on a historical cost basis. The equipment is amortized on a straight-line basis. The net income/loss is
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