Olivia Stevens is trying to value Wonderland’s shares, which are not growing at all. Wonderland declared and paid a $5 dividend last year. The required rate of return for its industry is 11%, but Olivia is unsure about the financial reporting integrity of Wonderland’s finance team, which has short-term focus. She decides to add an extra 1% ‘credibility’ risk premium to the required return as part of her valuation analysis.

**a) **What is the value of Wonderland’s shares, assuming that the financials are trustworthy?

**b) **What is the value of Wonderland’s shares, assuming that Olivia includes the extra 1% ‘credibility’ risk premium?

**c)** What is the difference between the values found in parts a and b, and how might one interpret that difference?

**d) **What are the key issues for valuation when the finance team adopts a short-term focus? (1 X 4 = 4 Marks)

b) Consider the mixed streams of cash flows shown in the following table.

**Cash flow stream
**

Year A B

1 $50 000 $10 000

2 40 000 20 000

3 30 000 30 000

4 20 000 40 000

5 10 000 50 000

Totals $150 000 $150 000

**a) Calculate **the present value of each stream using a 15% discount rate.

**b) Compare **the calculated present values and discuss them in light of the fact that the undiscounted cash flows total $150 000 in each case.