4-14 - PART B Stuff to know in order to understand this...

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PART B Stuff to know in order to understand this problem: Asset value at time n is the asset value at time n-1 times 1+interest rate, minus cash flows. P n = P n-1 (1+r)-CF n In part B, we use the changes in asset value to calculate the depreciation: P j –P j-1 = Change in asset value Income = Economic depreciation + Cash P n-1 r = P n -P n-1 +CF n Income in period n is the asset value at the beginning of the period multiplied by the interest rate = P n-1 r Accrual (change in asset value, economic depreciation) is P n -P n-1 Cash = CF n BALANCE SHEET Period 0 1 2 3 Cash 0 0 0 0 = cash revenue – cash dividends Asset 1000 990 1089 0 = asset value at time n Cap Stock 1000 1000 1000 1000 did not change throughout periods Ret Earn 0 -10 89 -1000 = Beg RE + Income – dividends paid INCOME STATEMENT 1 2 3 Cash Rev 110 0 1197.90 Econ Dep 10 +99 208.90 TOTAL INCOME Economic Income 100 99 108.90 307.90 Economic income = r*beginning asset value P 2 = 1197.90/1.1 = 1089 P 1 = 1197.90/1.1 2
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4-14 - PART B Stuff to know in order to understand this...

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