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Operations, marketing, and finance function independently of each other in most

organizations.

Select one:

True

False

Problem $1-(17$ marks total$)$

Weather Ltd$.$ operates under ideal conditions of uncertainty. Its operations are highly

dependent on the weather. For any given year, the probabilities are $0\mathrm{.}35$ that the weather will be

bad and $0\mathrm{.}65$ that it will be good. These state probabilities are independent over time. That is$,$ the

state probabilities for a given year are not affected by the actual weather in previous years.

Weather Ltd$.$ produces a single product for which the demand will fall to zero at the end

of $2$ years $($i$.$e$.,$ there will be no additional sales after $2$ years$).$

It produces this product using specialized machinery, which will have no value at the end

of $2$ years.

The machinery was purchased on $1$ January, $2024.$ It was financed in part by means of a

bank loan $($see next bullet point$)$ with the balance financed by capital stock.

The bank loan requires the principal of $$12,000$ to be repaid at the end of $2025($i$.$e$.,$ it is a

two$-$year loan$).$ Interest on the bank loan is payable at the end of each year at the agreed

upon amount of $itinto.$*$

No dividends will be paid until the end $2025.$

The interest rate in the economy is $8\%.$

Cash flows are not received until the end of each year.

Amounts of cash flows for each year are given in the following payoff table:

You need to work out the present value of the loan. Discount all of the cash outflows related to

the loan to find this present value. This is pretty much the same way you do it in standard

accounting. The actual amount buyers will pay for the bond reflects the present value.

Required.

a$.$ Assuming that the state realization for $2024$ is good weather$-$ prepare, in good form, an

income statement for $2024,$ and a balance sheet as at the end of $2024.$ Include your

calculations on your rough work page. $(10$ marks$)$

b$.$ Explain why the financial statements prepared above are both completely relevant and

completely reliable. $(4$ marks$)$

c$.$ As at January $1,2025,$ how much is the expected net income for $2025(3$ marks$)$

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