Question

	F. Corp	J. Corp	J. Corp
	Book Value	Book Value	Fair Value
Cash & receivables	$ 11,000	$       300	$       250
Inventory	$ 12,500	$    1,700	$    3,450
PP&E (net)	$ 28,000	$    2,500	$    4,100
	$ 51,500	$    4,500	$    7,800
Current Payables	$    7,500	$       550	$       600
Long Term Debt	$ 14,000	$    2,000	$    1,700
	$ 21,500	$    2,550	$    2,300
Net Assets	$ 30,000	$    1,950	$    5,500
Equity:
Capital Stock at Par ($1)	$    6,000	$       400
Addt'l Paid In Capital	$    5,000	$       700
Retained Earnings	$ 19,000	$       850
Total Equity	$ 30,000	$    1,950

Suppose that F. Corp acquires 20% of the outstanding shares of J. Corp with cash of $2mm. J. Corp earns $100,000 each year in Net Income and its payout ratio is 15%. What will be the value on F. Corp’s balance sheet of this investment at the end of Year 3?

	A.	$2,106
	B.	$2,267
	C.	$2,451
	D.	$2,064
	E.	$2,051

Answer 1

Year 1 = investment +(net income-dividend)* share

=$2,000,000+ ($100,000-$15,000 payout )*20%

=$2,017,000

(payout = ($100,000*15%)=$15,000)

Year 2= Investment at the end of year 1 + (Net income-dividend)*20%

=$2,017,000+ $ ($100,000-$15,000 payout )*20%

=$2,034,000

Year 3 = Investment at the end of year 2 + (Net income-dividend)*20%

$2,034,000+$17,000

=$2,051,000

Thus, the value on F. Corp’s balance sheet of this investment at the end of Year 3 is $2,051

Answer E

Please upvote if t his was helpful.In case of query please comment.