Thor Inc. owns $25\%$ of the common shares of Loki Corp. The other $75\%$ of the shares are owned by the Loki family. Thor acquired the shares eight years ago through a financing transaction. Each year, Thor has received a dividend from Loki. Loki has been in business for $60$ years and continues to have strong operations and cash flows. Thor must determine the fair value of this investment at its year end. Since there is no market on which the shares are traded, Thor must use a discounted cash flow model to determine fair value.

Thor management intends to hold the shares for five more years, at which time they will sell the shares to the Loki family under an existing agreement for $$1$ million. There is no uncertainty in this amount. Management expects to receive dividends of $$80,000$ for each of the five years, although there is a $20\%$ chance that dividends could be $$50,000$ each year. The risk$-$free rate is $4\%$ and the risk$-$adjusted rate is $6\%.$

Required

$1.$ Identify some of the items Thor will need to consider in determining the fair value of the investment.

$2.$ Calculate the fair value of the investment in Loki using the traditional approach with factor Tables PV$\mathrm{.}1$ and PV$\mathrm{.}2($found in your textbook$)$

$3.$ Calculate the fair value of the investment using the expected cash flow approach.

$4.$ In this case, which discounted cash flow model is the best? Why?