Question

On January 1, year 1, Dave received 1,100 shares of restricted stock from his employer, RRK Corporation. On that date, the stock price was $26 per share. On receiving the restricted stock, Dave made the 83(b) election. Dave’s restricted shares will vest at the end of year 2. He intends to hold the shares until the end of year 4, when he intends to sell them to help fund the purchase of a new home. Dave predicts the share price of RRK will be $46 per share when his shares vest and will be $49 per share when he sells them. Assume that Dave’s price predictions are correct and answer the following questions: (Leave no answers blank. Enter zero if applicable. Round your final answer to the nearest whole dollar value. Enter all amounts as positive values.)

b. If Dave’s stock price predictions are correct, what are the tax consequences of these transactions to RRK?
Tax consequences
Grant date:
Vesting date:
Sale date:

Answer 1

To calculate what an investor would pay for a share of Babble, Inc., the present value of future profits is computed using a 15% discount rate. After determining the total present value of the profits, this is divided by the total number of shares (200) to arrive at a price per share, which is approximately $256,500 in this scenario.

Step-by-step explanation:

To determine what an investor might pay for a share in Babble, Inc., one would calculate the present value (PV) of the future profits, taking into account any discount rate. If the predicted profits are $15 million immediately, $20 million one year from now, and $25 million two years from now, these values need to be adjusted for the time value of money.

For example, if we assume a discount rate of 15%, we calculate separate present values for profits expected at different times, then add these values to obtain the present value of total expected profits. Once we have the total present value (TPV), we divide it by the number of shares to find the price per share. The provided example concludes with a TPV of $51.3 million divided by 200 shares, resulting in a value of approximately $256,500 per share.

Keep in mind that in the real world, these profits are estimates, and factors like interest rates can impact the value calculation significantly.