As a trainee accountant in a firm of accountants you have been asked, using the fundamental valuation model, to value the following assets which are owned by one of the firm’s clients.
1. Shares in a number of leading ‘blue-chip’ companies from which your client expects to receive annual dividends totalling £1,000 per year indefinitely.
2. A holiday cottage which according to two different professional valuation agents is estimated to be worth either £80,000 or £120,000 in five years time. Your client considers these valuations to be equally likely. In the first case the relevant required rate of return is 13 per cent and in the second case, because of the greater risk (variability of returns) the required rate of return has been estimated at 18 per cent. All cash flows are assumed to occur at year end. Round your answers to the nearest £.