Teal Mountain Inc. owns 25% of the common shares of Indigo Corporation The other 75% of the shares are owned by the Indigo family. Teal Mountain acquired the shares eight years ago through a financing transaction. Each year, Teal Mountain has received a dividend from Indigo. Indigo has been in business for 60 years and continues to have strong operations and cash flows. Teal Mountain must determine the fair value of this investment at its year end. Since there is no market on which the shares are traded, Teal Mountain must use a discounted cash flow model to determine fair value. Teal Mountain management intends to hold the shares for 5 more years, at which time they will sell the shares to the Indigo family under an existing agreement for $1 million. There is no uncertainty in this amount. Management expects to receive dividends of $70,000 for each of the five years, although there is a 20% chance that dividends could be $51,000 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.

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Calculate the fair value of the investment in Indigo using the traditional approach. (For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round answers to 0 decimal places, e.g. 5,275.)

Fair value of the investment

$enter the Fair value of the investment in dollars

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Calculate the fair value of the investment using the expected cash flow approach. (For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round answers to 0 decimal places, e.g. 5,275.)

Fair value of the investment

$enter the Fair value of the investment in dollars

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

The select a discounted cash flow model

traditional approachexpected cash flow approach is best.