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TanVan Corp. operates under conditions of uncertainty. The firms' cash flows depend on the state of the economy. The odds that the economy will
TanVan Corp. operates under conditions of uncertainty. The firms' cash flows depend on the state of the economy. The odds that the economy will be in a good condition are 75%. If the economy is good the expected cash flows are $1,500; and if the economy is poor the expected cash flows are reduced to $1,100. After two years the firm will stop operations and all assets will have zero value. The interest rate in the economy is 7%. Prepare the income statement and balance sheet for the firm after 1 year if it experiences a bad year. Assume the firm is financed with 100% equity and that it doesn't pay a dividend.
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