Metlock, Inc. owns 25% of the common shares of Sarasota Corp. The other 75% of the shares are owned by the Sarasota family. Metlock acquired the shares eight years ago through a financing transaction. Each year, Metlock has received a dividend from Sarasota. Sarasota has been in business for 60 years and continues to have strong operations and cash flows. Metlock must determine the fair value of this investment at its year end. Since there is no market on which the shares are traded, Metlock must use a discounted cash flow model to determine fair value. Metlock management intends to hold the shares for 5 more years, at which time they will sell the shares to the Sarasota family under an existing agreement for $1 million. There is no uncertainty in this amount. Management expects to receive dividends of $89,000 for each of the five years, although there is a 20% chance that dividends could be $40,000 each year. The risk-free rate is 6% and the risk-adjusted rate is 8%. Click here to view the factor table PRESENT VALUE OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY OF 1.

Calculate the fair value of the investment in Sarasota

Fair value of the investment

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

Fair value of the investment

In this case, which discounted cash flow model is the best?

The select a discounted cash flow model expected cash flow approachtraditional approach is best.