Question
Splish Brothers Inc. owns 25% of the common shares of Marigold Corp. The other 75% of the shares are owned by the Marigold family. Splish
Splish Brothers Inc. owns 25% of the common shares of Marigold Corp. The other 75% of the shares are owned by the Marigold family. Splish Brothers acquired the shares eight years ago through a financing transaction. Each year, Splish Brothers has received a dividend from Marigold. Marigold has been in business for 60 years and continues to have strong operations and cash flows. Splish Brothers must determine the fair value of this investment at its year end. Since there is no market on which the shares are traded, Splish Brothers must use a discounted cash flow model to determine fair value. Splish Brothers management intends to hold the shares for 5 more years, at which time they will sell the shares to the Marigold family under an existing agreement for $1 million. There is no uncertainty in this amount. Management expects to receive dividends of $82,500 for each of the five years, although there is a 20% chance that dividends could be $54,000 each year. The risk-free rate is 5% and the risk-adjusted rate is 7%.
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