Question

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.

Answer 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

Answer 2

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.