COMM 318 Lecture Notes - Lecture 3: Incomplete Markets, Dividend Policy, Historical Cost
8 Apr 2016
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Document Summary
Provides utmost in relevant informaion to inancial statements users. Relevant informaion: informaion about the irm"s future economic prospects (dividends, cash lows, proit abiliies) Certainty : future cash lows of the irm and interest rate in the economy are publicly known with certainty . 1 asset, no liabiliies and year end cf of for 2 years, interest rate 10%. Pa0 = 150/1. 10 + 150/1. 102 = 136. 56 + 123. 97 = 260. 33 (viu) Accreion of discount: stream of cash receipts is one year closer at the end of the year than it was at the beginning = 26. 03 (260. 33*10%) Under ideal condiions of future cash lows with certainty and a given interest rate in the economy, it is possible to prepare completely relevant and reliable inancial statements. State 1: bad state economy is bad. State 2 good state economy is good. States of nature: uncertain uncontrolled future events that afect irm performance (state of economy)
