6. Beverly Enterprises owns a nursing home that is currently earning $2.0 million in cash flow on an annual basis, but this amount is expected to drop in the future. The nursing home has a book value of $20 million, a replacement cost of $40 million, and a current sale value of $10 million. If Beverly Enterprises has a cost of capital equal to 15 percent, at what value of annual cash flow would Beverly Enterprises be likely to sell the nursing home?
5. In 20X4, Olentangy Health Care (OHC)’s cost of capital was 6%. Its investments on a historical cost valuation basis are $80,000, on a replacement cost basis are $100,000, and on a current market value basis are $110,000. If you were on OHC’s board, what minimum level of annual cash flow would you require in order to continue operations and proceed with planned significant new investments?
$6,000. Significant new investments should be made only if the return based on replacement cost is greater than the firm’s cost of capital. So, what cash flow, when divided $100,000, gives 6%.
4. Accounts receivable (net) increased by $500,000 during the year. This increase has what effect on cash flow?
A. Reduces it
B. Increases it
C. No effect
3. Which of the following is not a “principle” of financial accounting?
A. Historical cost
B. Revenue recognition
E. Full disclosure
1. List and discuss the three payment-determination bases.
2. List and describe the three categories of net assets.