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1 Pat invests in a limited partnership and pays $150,000 for a 10% interest
1 Pat invests in a limited partnership and pays $150,000 for a 10% interest. He receives a K-1 with his loss at $80,000. How much of his loss is suspended under the at-risk rules?
a. $0.
b. $8,000.
c. $15,000.
d. $80,000.
2
Assume that a f?rm will generate the following cash flows. (Ignore liquidation value and initial investment.) Also assume that the interest rate you would receive on an alternative investment of equal risk is 10%
End of year 1: $110
End of year 2: $242
End of year 3: $133.10
What is the value of the firm based on these cash flows?
Expert Solution
1
The correct answer is a. $0
Explanation-
Since this is his only activity and not a material participant. Therefore, he is at risk for $150,000 , so nothing is suspended under the at-risk rules.
The entire $80,000 is suspended under the passive activity rules.
2
Given Rate of interest = 10%
We know that Value of the Firm is nothing but Present value of future Cash inflows at required rate of return.
Computation of Present Value of Future Cash flows
| Year | Cash flows | Disc @ 10% [ 1/( 1+i)^n | Discounting Factor at 10% | Discounted Cash flows( Cash flow* Discounting Factor) |
| 1 | $110 | 1/( 1.10)^1 | 0.90909 | $100.000 |
| 2 | $242 | 1/( 1.10)^2 | 0.82645 | $200.000 |
| 3 | $133.10 | 1/( 1.10)^3 | 0.75131 | $100.000 |
| Total | $400.000 |
Hence the Value of the Firm is $ 400
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