Question

In: Accounting

Shamrock, Inc. owns 25% of the common shares of Whispering Winds Corp. The other 75% of...

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

Shamrock management intends to hold the shares for 5 more years, at which time they will sell the shares to the Sheffield family under an existing agreement for $1 million. There is no uncertainty in this amount. Management expects to receive dividends of $81,000 for each of the five years, although there is a 20% chance that dividends could be $47,500 each year. The risk-free rate is 6% and the risk-adjusted rate is 8%.

Calculate the fair value of the investment in Sheffield 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.)

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.)

Solutions

Expert Solution

calculation of the fair value of the investment as per traditional approch

annual cash expected = $81000( PV factor of anuity 5 years , 8% )

= $ 81000* 3.9927100 = $ 323410

and at the end of 5 year sales proceed also received

= $ 10,00,000 ( PV factor for year 5 , 8% )

= $ 10,00,000 * .680583

=$ 680583

hence the fair value of investment = $ 323410 + $ 680583 = 1003993

2)calculation of the fair value of the investment as per expected cash flow  approch

The probability weighted annual cash flow is
$ 81000 * 80%   $ 64800 because 80% chance dividend of 81000 will be received
$ 47500 * 20% $ 9500 because 20% chance dividend of 47500 will be received
$ 74300

annual cash flow = $ 74300 ( ( PV factor of anuity 5 years , 6% )

= $ 74300 * 4.21236

=$ 312978

and at the end of 5 year sales proceed also received

= $ 10,00,000 ( PV factor for year 5 , 6% )

= $ 10,00,000 * 0.747258

=$ 747258

hence the fair value of investment = $ 312978 + $ 747258 = 1060236

in the cash flow approch we take risk free rate because cash flows are already adjusted for risk so we discounted with risk free rate

ekkarill92 answered 1 year ago
Next > < Previous

Related Solutions

In early 2017, for the first time, Whispering Winds Corp. invested in the common shares of...
In early 2017, for the first time, Whispering Winds Corp. invested in the common shares of another Canadian company. It acquired 5,900 shares of Toronto Stock Exchange-traded Bayscape Ltd. at a cost of $81,125. Bayscape is projected to reach a value of $15.50 per share by the end of 2017 and $17.00 by the end of 2018, and has consistently paid an annual dividend of $0.90 per share. Whispering Winds is also a Canadian public corporation with a December 31...
Problem 12-9A Condensed financial data of Whispering Winds Corp. follow. Whispering Winds Corp. Comparative Balance Sheets...
Problem 12-9A Condensed financial data of Whispering Winds Corp. follow. Whispering Winds Corp. Comparative Balance Sheets December 31 Assets 2017 2016 Cash $ 158,368 $ 94,864 Accounts receivable 172,088 74,480 Inventory 220,500 201,586 Prepaid expenses 55,664 50,960 Long-term investments 270,480 213,640 Plant assets 558,600 475,300 Accumulated depreciation (98,000 ) (101,920 ) Total $1,337,700 $1,008,910 Liabilities and Stockholders’ Equity Accounts payable $ 199,920 $ 131,908 Accrued expenses payable 32,340 41,160 Bonds payable 215,600 286,160 Common stock 431,200 343,000 Retained earnings 458,640...
Problem 12-9A Condensed financial data of Whispering Winds Corp. follow. Whispering Winds Corp. Comparative Balance Sheets...
Problem 12-9A Condensed financial data of Whispering Winds Corp. follow. Whispering Winds Corp. Comparative Balance Sheets December 31 Assets 2017 2016 Cash $ 158,368 $ 94,864 Accounts receivable 172,088 74,480 Inventory 220,500 201,586 Prepaid expenses 55,664 50,960 Long-term investments 270,480 213,640 Plant assets 558,600 475,300 Accumulated depreciation (98,000 ) (101,920 ) Total $1,337,700 $1,008,910 Liabilities and Stockholders’ Equity Accounts payable $ 199,920 $ 131,908 Accrued expenses payable 32,340 41,160 Bonds payable 215,600 286,160 Common stock 431,200 343,000 Retained earnings 458,640...
Question 1 Splish Brothers Inc. owns 25% of the common shares of Culver Corporation The other...
Question 1 Splish Brothers Inc. owns 25% of the common shares of Culver Corporation The other 75% of the shares are owned by the Culver family. Splish Brothers acquired the shares eight years ago through a financing transaction. Each year, Splish Brothers has received a dividend from Culver. Culver 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...
Whispering Winds Corp. Inc. had a beginning inventory of 95 units of Product RST at a...
Whispering Winds Corp. Inc. had a beginning inventory of 95 units of Product RST at a cost of $7 per unit. During the year, purchases were: Feb. 20 610 units at $8 Aug. 12 395 units at $10 May 5 480 units at $9 Dec. 8 100 units at $11 Whispering Winds Corp. uses a periodic inventory system. Sales totaled 1,535 units. Determine the ending inventory and the cost of goods sold under each of the assumed cost flow methods...
Rosanna owns 65% of the common shares of Rosanna’s Flowers Ltd. (RFL). Samantha owns 75% of...
Rosanna owns 65% of the common shares of Rosanna’s Flowers Ltd. (RFL). Samantha owns 75% of the common shares of Riddled with Rain Investments Ltd. (RRIL). The other 25% of RRIL common shares are owned by unrelated persons. RRIL owns all of the common shares of Treading Water Ltd. (TWL). RRIL also owns the remaining 35% of the common shares of RFL. Rosanna is married to Samantha’s nephew, Sandro. The 35% ownership of RRIL in RFL was to provide RFL...
Whispering Winds Corp. purchased a piece of equipment for $ 70,100. It estimated an  8-year life and...
Whispering Winds Corp. purchased a piece of equipment for $ 70,100. It estimated an  8-year life and a $ 2,900 salvage value. At the end of year four (before the depreciation adjustment), it estimated the new total life to be  10 years and the new salvage value to be $ 8,500. Compute the revised depreciation. (Round answer to 0 decimal places, e.g. 5,275.) Revised annual depreciation $____________
Whispering Winds Deck System Corporation is a public company whose shares are actively traded on the...
Whispering Winds Deck System Corporation is a public company whose shares are actively traded on the Toronto Stock Exchange. The following transactions occurred in 2020: Jan. 1 The company was granted a charter that authorizes the issuance of an unlimited number of common shares, and 244,000 preferred shares that entitle the holder to a $3 per share annual dividend. Jan. 10 Issued 15,300 common shares to the founders of the corporation for land that has a fair value of $459,000....
The following three accounts appear in the general ledger of Whispering Winds Corp. during 2019.The following...
The following three accounts appear in the general ledger of Whispering Winds Corp. during 2019.The following three accounts appear in the general ledger of Whispering Winds Corp. during 2019. Equipment Date Debit Credit Balance Jan. 1 Balance 161,000 July 31 Purchase of equipment 71,700 232,700 Sept. 2 Cost of equipment constructed 54,400 287,100 Nov. 10 Cost of equipment sold 49,700 237,400 Accumulated Depreciation—Equipment Date Debit Credit Balance Jan. 1 Balance 69,000 Nov. 10 Accumulated depreciation on equipment sold 29,800 39,200...
The stockholders’ equity accounts of Whispering Winds Corp. on January 1, 2017, were as follows. Preferred...
The stockholders’ equity accounts of Whispering Winds Corp. on January 1, 2017, were as follows. Preferred Stock (7%, $100 par noncumulative, 4,650 shares authorized) $279,000 Common Stock ($5 stated value, 306,000 shares authorized) 1,274,999 Paid-in Capital in Excess of Par Value—Preferred Stock 13,950 Paid-in Capital in Excess of Stated Value—Common Stock 489,600 Retained Earnings 699,500 Treasury Stock (4,650 common shares) 37,200 During 2017, the corporation had the following transactions and events pertaining to its stockholders’ equity. Feb. 1 Issued 4,860...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT