Blue Ocean Ltd. owns a 25% common share interest in Red Ocean Ltd. Blue Ocean acquired the shares nine years ago through a financing transaction. Each year, Blue Ocean has received a dividend from Red Ocean. Red Ocean has been in business for 50 years and continues to have strong operations and cash flows. Blue Ocean must determine the fair value of this investment at its year end. Since there is no market on which the shares are traded, Blue Ocean must use a discounted cash flow model to determine fair value.

Blue Ocean management intends to hold the shares for five more years, at which time they will sell the shares to a shareholder of Red Ocean under an existing agreement for $1 million. There is no uncertainty in this amount. Management expects to receive dividends of $80,000 for each of the five years, although there is a 20% chance that dividends could be $50,000 each year. The risk-free rate is 4$ and the risk-adjusted rate is 6%.

1.List 3 items that Blue Ocean will need to consider in determining the fair value of the investment.

2.Calculate the fair value of the investment in Red Ocean using the traditional approach.

3.Calculate the fair value of the investment using the expected cash flow approach.

2. Alpha Corporation is preparing a contract to lease a machine from Beta Corporation for a period of 25 years. Alpha has an investment cost of $365,755 in the machine, which has a useful life of 25 years and no salvage value at the end of that time. Alpha is interested in earning an 11% return on its investment and has agreed to accept 25 equal rental payments at the end of each of the next 25 years.

we must to provide the amount of each of the 25 rental payments that will yield an 11% return on investment.

3.Spin Corporation manufacturers cycling equipment for fitness classes. Recently, the company's Executive VP of Operations requested construction of a new plant to meet the increasing demand for the company's workout bikes. After considering the request, the BOD has decided to raise funds for the new plant by issuing $2,000,000 of 11% term corporate bonds on March 1, 2021, due on March 1, 2035, with interest payable each March 1 and September 1. At the time of issuance, the market interest rate for similar financial instruments is 10%.

1.Determine the selling price of the bonds

2.What is the basis of measurement for the bond?