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Instructions: The Company has one asset. The asset has a three-year life and two possible payoffs each year: 1) $750 with a probability of 40%, and 2) $100 with a probability of 60%. The company depreciates assets using the straight-line method. Assume the states between years are independent, an interest rate of 6%, and state 1 is realized in year 1. Show the balance sheet, income statement, and residual income / goodwill analysis for year 1.
IBelieve this is the right answer, but I'm not totally sure goodwill was calculated correctly. Year 0 1 Balance Sheet Cash $0.00 $750.00 Investment(Book Value) $962.28 $641.52 Total Assets $962.28 $1,391.52 Net Worth Invest Capital $962.28 $962.28 Retained Earnings $0.00 $429.24 Total Net Worth $962.28 $1,391.52 Income Statement Actual cash flows $750.00 Depreciation $320.76 Interest Income $0.00 Net Income $429.24 Residual Income Analysis- Year 1 Expected interest income $45.00 Depreciation $320.76 Actual if good state $750.00 Good state Net Income $474.24 Expected Interest Income $45.00 Depreciation $320.76 Actual if bad state $100.00 Bad state Net Income ($175.76) Expected Income $214.24 Return on Net Worth $83.49 Expected abnormal earnings $130.75 Goodwill $118.86 Valuation BV 1391.522868 Gw $118.86 PA 1510.383953
I think this is right up to expected income. Don't you have to add the Good State x .60 and the bad state x .40 to arrive at expected income? And you take the present value of goodwill in the valuation.
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