Question

Kaye Company acquired 100% of Fiore Company on January 1, 2011. Kaye paid $1,000 excess consideration over book value which is being amortized at $20 per year. Fiore reported net income of $400 in 2011 and paid dividends of $100.

Assume the equity method is applied. How much will Kaye's income increase or decrease as a result of Fiore's operations?

Answer 1

To find out the value of a share of stock in Babble, Inc., calculate the present value of future dividend payments and divide by the number of shares. However, without the discount rate, precise valuation is not possible.

Step-by-step explanation:

Calculation of the Value of Stock for Babble, Inc.

To determine what an investor would pay for a share of stock in Babble, Inc., we need to consider the value of the future dividend payments. As these payments are set for the present, one year from now, and two years from now, we will calculate the present value of these dividends. We will assume that there is no growth in dividends considering the company will be disbanded. However, we need to choose an appropriate discount rate to calculate the present value of the future dividend payments. As this rate is not provided, the calculation is generally done by estimating the investor's required rate of return.

Assuming 'r' to be the discount rate, the present value (PV) of the dividends can be calculated as follows:

• PV of $15 million received today = $15 million / (1 + r)^0
• PV of $20 million received in one year = $20 million / (1 + r)^1
• PV of $25 million received in two years = $25 million / (1 + r)^2

The sum of these present values represents the total value of the company in terms of dividends that can be paid out. As there are 200 shares of stock, the price per share would be this total value divided by 200. The formula used does not explicitly consider the rate of return for Babble, Inc. as the information is not given, so an assumption must be made.