Homework Help is Here – Start Your Trial Now!
Business
Accounting
Kingbird Inc. owns 25% of the common shares of Ayayai Corp. The other 75% of the shares are owned by the Ayayai family. Kingbird acquired the shares eight years ago through a financing transaction. Each year, Kingbird has received a dividend from Ayayai. Ayayai has been in business for 60 years and continues to have strong operations and cash flows. Kingbird must determine the fair value of this investment at its year end. Since there is no market on which the shares are traded, Kingbird must use a discounted cash flow model to determine fair value. Kingbird management intends to hold the shares for 5 more years, at which time they will sell the shares to the Ayayai family under an existing agreement for $1 million. There is no uncertainty in this amount. Management expects to receive dividends of $77,500 for each of the five years, although there is a 20% chance that dividends could be $48,500 each year. The risk-free rate is 5% and the risk- adjusted rate is 7%.

Kingbird Inc. owns 25% of the common shares of Ayayai Corp. The other 75% of the shares are owned by the Ayayai family. Kingbird acquired the shares eight years ago through a financing transaction. Each year, Kingbird has received a dividend from Ayayai. Ayayai has been in business for 60 years and continues to have strong operations and cash flows. Kingbird must determine the fair value of this investment at its year end. Since there is no market on which the shares are traded, Kingbird must use a discounted cash flow model to determine fair value. Kingbird management intends to hold the shares for 5 more years, at which time they will sell the shares to the Ayayai family under an existing agreement for $1 million. There is no uncertainty in this amount. Management expects to receive dividends of $77,500 for each of the five years, although there is a 20% chance that dividends could be $48,500 each year. The risk-free rate is 5% and the risk- adjusted rate is 7%.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
See similar textbooks
icon
Related questions
Question

Manji

4 Current Attempt in Progress Kingbird Inc. owns 25% of the common shares of Ayayai Corp. The other 75% of the shares are owned by the Ayayai family. Kingbird acquired the shares eight years ago through a financing transaction. Each year, Kingbird has received a dividend from Ayayai. Ayayai has been in business for 60 years and continues to have strong operations and cash flows. Kingbird must determine the fair value of this investment at its year end. Since there is no market on which the shares are traded, Kingbird must use a discounted cash flow model to determine fair value. Kingbird management intends to hold the shares for 5 more years, at which time they will sell the shares to the Ayayai family under an existing agreement for $1 million. There is no uncertainty in this amount. Management expects to receive dividends of $77,500 for each of the five years, although there is a 20% chance that dividends could be $48,500 each year. The risk-free rate is 5% and the risk- adjusted rate is 7%. 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. (b) Calculate the fair value of the investment in Ayayai using the traditional approach with the present value tables. (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 $
Transcribed Image Text:4 Current Attempt in Progress Kingbird Inc. owns 25% of the common shares of Ayayai Corp. The other 75% of the shares are owned by the Ayayai family. Kingbird acquired the shares eight years ago through a financing transaction. Each year, Kingbird has received a dividend from Ayayai. Ayayai has been in business for 60 years and continues to have strong operations and cash flows. Kingbird must determine the fair value of this investment at its year end. Since there is no market on which the shares are traded, Kingbird must use a discounted cash flow model to determine fair value. Kingbird management intends to hold the shares for 5 more years, at which time they will sell the shares to the Ayayai family under an existing agreement for $1 million. There is no uncertainty in this amount. Management expects to receive dividends of $77,500 for each of the five years, although there is a 20% chance that dividends could be $48,500 each year. The risk-free rate is 5% and the risk- adjusted rate is 7%. 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. (b) Calculate the fair value of the investment in Ayayai using the traditional approach with the present value tables. (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 $
Expert Solution
steps

Step by step

Solved in 3 steps

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Corporate Distributions and Adjustments
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education
SEE MORE TEXTBOOKS