Question
Shamrock, Inc. is using a discounted cash flow model. Scenario 1: Cash flows are fairly certain Scenario 2: Cash flows are uncertain $170/year for 5
Shamrock, Inc. is using a discounted cash flow model.
| Scenario 1: Cash flows are fairly certain | Scenario 2: Cash flows are uncertain | |
| $170/year for 5 years | 75% probability that cash flows will be $170 in 5 years | |
| Risk-adjusted discount rate is 7% | 25% probability that cash flows will be $110 in 5 years | |
| Risk-free discount rate is 2% | Risk-adjusted discount rate is 7% | |
| Risk-free discount rate is 2% |
Identify which model Shamrock might use to estimate the discounted fair value under each scenario, and calculate the fair value.
Scenario 1:
| Shamrock might use | a.) expected cash flow b.) traditional approach model. |
| Fair Value | $ |
Scenario 2:
| Shamrock might use | a.) expected cash flow b.) traditional approach model. |
| Fair Value | $ |
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Fundamentals of Financial Management
Authors: Eugene F. Brigham, Joel F. Houston
15th edition
1337671002, 978-1337395250
