Hi,
a questions in regards to mock exam on CFA site. Not sure if there’s an error or I’m misunderstanding the answer. Assistance appreciated!
Cheers,
K.
Masson is selling the distribution center for $200 million. The net book value of the center would have been $170 million at year end therefore the company will record a $30 million gain. I reflected the gain in my projections as an increase in net income in 2014. There will be no taxes on this gain due to the availability of loss carry forwards.
Because the sale will occur at the end of the fiscal year I took a full year’s depreciation for 2014. The $10 million in annual rent expense Masson will pay to Sequoia for the use of the center is the same as the annual depreciation expense they had been taking on the center.
If Aubry’s projected information needed to be adjusted because the distribution center was not sold, her revised estimate of Masson’s ratio of cash flow from operations to net income ratio for 2014 would most likely be
the same. higher. lower.
Comparison of the net income and CFO under both scenarios:
Aubry’s Projections
If Center not sold
Effect on CFO/NI
CFO
The gain is deducted from the higher NI to determine CFO
Same CFO
Aubry’s projected ratio is higher (same CFO but lower NI)
Net income
Includes $30 million gain
Lower NI
(no gain included)