XYZ Inc. (XYZ) is a privately held and New Brunswick incorporated company with its head office in Minto, New Brunswick. The common shares of XYZ are owned as follows:

David (Husband) - 51%

Mary (Wife) - 30%

James (step-son) - 19%

The Directors of XYZ are David and Mary.

XYZ is, through the good management of Larry, abundantly cash rich and has no short-term or long term Debt. The Retained Earnings of XYZ as at December 31, 2021 are $15.0 million.

Larry, Davids Father, died on December 30, 2021. David, through his Last Will, left all the common shares in XYZ to David, Mary and James (as reflected above). Prior to Larrys death, neither David, Mary nor James played any role in the affairs/business of XYZ.

James is a 25-year-old High-school drop-out, and is hoping to convince his parents to utilize the cash resources of XYZ to expand the operations of XYZ. David and Mary are, respectively, 62 years old and 42 years old.

James has undertaken some research over the Internet, and has concluded that he has identified a great investment opportunity ABC Ltd. (ABC) - for XYZ. James Internet research has led him to conclude as follows relative to ABC:

1. ABC is a privately held company incorporated in Panama in 2004;

2. The sole shareholder and Director of ABC is an individual Robyn Hoode - living in France;

3. ABC operates a furniture manufacturing business located in Ukraine near the border with Russia;

4. ABC has generated the following cash flows (all unaudite over the years referenced below (all in Cdn $):

2015: $100,000.00

2016: $375,000.00

2017: $875,000.00

2018: $125,000.00

2019: $1,500,000.00

5. The future cash inflows of ABC are forecasted to be as follows (all Cdn $):

2022: $250,000.00

2023: $1,750,000.00

2024: $340,000.00

2025: $800,000.00

2026: $350,000.00

Total: $3,490,000.00

6. Through an exchange of emails, Robyn Hoode has advised James that the purchase price to acquire the sole share of ABC is $2.5million (Cdn), payable as follows:

Jan 1, 2023: $1,700,000

Jan 1, 2024: $500,000

Jan 1, 2025: $300,000

7. Jamess research also reveals that ABC will need to replace manufacturing equipment in the year 2024. The anticipated replacement costs total $500,000.00 Cdn

8. According to James, XYZ stands to generate a guaranteed profit of approximately $500,000.00 from the acquisition of ABC, calculated as follows:

Future Cash Flows: $3,490,000.00

Less:

Purchase Price: $2,500,000.00

Replacement Costs: $ 500,000.00

Profit $ 490,000.00

Your research has revealed the following:

• the risk-free rate in Canada is currently 2%;

• There are no preferred shares outstanding within XYZ;

• David is the step-father of James;

• ABC has never been subjected to an audit by an independent firm of external auditors;

• the market risk premium for this potential investment is, at least, 18%, and,

• The historic and forecasted cash inflows of ABC have been provided to James by Robyn Hoode via Facebook.

Your Mandate

You have been retained by David to advise him in writing on the issues arising against the backdrop of the potential acquisition of ABC. David expects a report with both narrative comments and quantitative analysis, along with appropriate recommendations.

David and Mary have been under a lot of pressure from James to make the purchase of the ABC share. James expects to be appointed as the CEO of ABC and to live in Panama.his freedom from the hustle and bustle of living in Minto, New Brunswick.

Davids focus is on the quality of the retirement years for him and Mary. Mary is confused, and just wants to avoid what she expects will be a confrontation between David and her son James over the potential acquisition of ABC.

David has advised you that your report in its entirety - will be shared with James and Mary.

Given Larrys recent death, David has been unable emotionally to consider any other investment opportunity for XYZ.

David prefers, where applicable, that the narrative portion of any report be in bullet point format.

David also advises that his training/education/experience as a Chartered Accountant has given him, over many years, a rather keen interest in quantitative analysis.

David advises that the narrative portion of your report cannot exceed five (5) letter-sized Pages.

In addition, David advises that he is open to any necessary assumptions underlying your report, provided the assumptions are (i) reasonable, (ii) consistent with each other, and (iii) clearly stated in your report, and,

David advises that your report is required to be delivered to him via email on or before 5;00 PM (Atlantic) on Friday March 4, 2022.

Required; Prepare the report.