A Canadian Firm Is Considering Purchasing a Subsidiary in Great $\le$

question 358

Multiple Choice

A Canadian firm is considering purchasing a subsidiary in Great Britain. The subsidiary will cost $\le$ 16 million and will generate cash inflows of $\le$ 7.6 million per year at the end of each of the next three years. After that, the company will be worthless. The current exchange rate is $\le$ 0.83 British pounds per $1. The Canadian inflation rate is expected to be 4% over this period. The current risk-free rate of interest in Canada is 5% and the risk-free rate in Great Britain is 8%.

What is the cost of the project in Canadian dollars?

• A) $13.28 million
• B) $14.63 million
• C) $19.28 million
• D) $21.53 million
• E) $23.03 million

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Definitions:

Owner's Capital Account

An equity account on the balance sheet representing the owner's investment and retained earnings in the business.

Trial Balance

A bookkeeping report that lists the balances of all ledgers in two columns, debit and credit, ensuring that the total debits equal total credits, which is crucial for the accuracy of financial statements.

Supplies

Items used in the operation of a business but not directly associated with the production of goods or services, such as office materials or cleaning supplies.

Adjusted Trial Balance

A list of all the accounts of a company, showing their balances after adjustments, used to prepare financial statements.