Question
Skysong Enterprises is using a discounted cash flow model. Identify which model Skysong might use to estimate the discounted fair value under each scenario, and
Skysong Enterprises is using a discounted cash flow model. Identify which model Skysong might use to estimate the discounted fair value under each scenario, and calculate the fair value using the present value tables:
Scenario 1: Cash flows are fairly certain
$250/year for 5 years
Risk-adjusted discount rate is 5%
Risk-free discount rate is 3%
Scenario 2: Cash flows are uncertain
75% probability that cash flows will be $250 in 5 years
25% probability that cash flows will be $120 in 5 years
Risk-adjusted discount rate is 5%
Risk-free discount rate is 3%
Which model ( traditional approach or expected cash flow) does the company use in Scenerio 1&2?
Caculate fair value in 2 scenerios.
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