Question

Tamarisk Inc, a private company, is authorized to issue an unlimited number of common shares and 96,000 noncumulative $4 preferred shares. It began operations on January 1, 2024, and the following are selected transactions during 2024: Jan. 1 Issued 288,000 common shares for $144,000cash. 2 Issued 28,800 preferred shares for $40 cash per share. Dec. 1 Declared a total of $216,000 in dividends, payable on January 5 , to shareholders of record on December 13. 31 Determined that it had total revenues of $878,400 and operating expenses of $585,600. Tamarisk elected to report under ASPE. It has a 15% income tax rate and paid income tax instalments during the year of $38,400.

Answer 1

To determine what an investor would pay for a share of Babble, Inc., we calculate the present value of future dividends per share over the next two years and sum them up. This involves discounting future profits at the investor's required rate of return.

Step-by-step explanation:

When considering how much an investor will pay for a share of stock in Babble, Inc., we need to calculate the present value of the expected dividends since the company will be disbanded in two years. The profits expected to be paid out as dividends are $15 million right away, $20 million one year from now, and $25 million two years from now. Given there are 200 shares of stock, the dividends per share are $75,000 right away ($15 million / 200), $100,000 after one year ($20 million / 200), and $125,000 after two years ($25 million / 200).

To determine the present value (PV) of these dividends, we use the formula PV = D / (1 + r)^n, where D is the dividend, r is the discount rate, and n is the number of years in the future the dividend will be paid. Assuming a certain discount rate, we sum the present value of each year's dividend to find out what an investor would be willing to pay for a share today.