Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Transcribed Image Text:Skysong, Inc. is using a discounted cash flow model.
Scenario 1: Cash flows are fairly certain
$180/year for 5 years
Risk-adjusted discount rate is 6%
Risk-free discount rate is 4%
Identify which model Skysong might use to estimate the discounted fair value under each scenario, and calculate the fair value. (For
calculation purposes, use 5 decimal places as displayed in the factor table provided. Round final answers to 2 decimal places, e.g. 5,275.25.)
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.
Scenario 1.
Skysong might use
Fair Value
Scenario 2:
Skysong might use
Fair Value
$
Scenario 2: Cash flows are uncertain
75% probability that cash flows will be $180 in 5 years
25% probability that cash flows will be $95 in 5 years
Risk-adjusted discount rate is 6%
Risk-free discount rate is 4%
$
traditional approach ✔ model.
expected cash flow
model.
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