Teal Mountain Inc. is using a discounted cash flow model. Scenario 1: Cash flows are fairly certain
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Question:
Teal Mountain Inc. is using a discounted cash flow model.
| Scenario 1: Cash flows are fairly certain | Scenario 2: Cash flows are uncertain | |
| $ 160/year for 5 years | 75% probability that cash flows will be $ 160 in 5 years | |
| Risk-adjusted discount rate is 5% | 25% probability that cash flows will be $ 115 in 5 years | |
| Risk-free discount rate is 3% | Risk-adjusted discount rate is 5% | |
| Risk-free discount rate is 3% |
Identify which model Teal Mountain 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:
| traditional approach expected cash flow fair value | |
Scenario 2:
| traditional approach expected cash flow fair value | |
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