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 there is no market on which the shares are traded, Splish Brothers must use a discounted cash flow model to determine fair value.

Splish Brothers management intends to hold the shares for 5 more years, at which time they will sell the shares to the Culver family under an existing agreement for $1 million. There is no uncertainty in this amount. Management expects to receive dividends of $71,500 for each of the five years, although there is a 20% chance that dividends could be $54,500 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.

1- Calculate the fair value of the investment in Culver 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

2-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

Could you please provide some explanation to the answers. Thank you

Expert Solution

jeff jeffy answered 1 year ago

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