Question

Laveel Entergeises expects earrings nexd year of $4.04 per share and has a 30% relention rate, which it plans to keep conscket its equity cout of captal is 9% which it alse its expected rehrn on new investment. Its eamings are expected to grow lorever at a rato of 2.7% per year. If ts next divdend is due in one yeac, what do ycu eatimule the frmis curtent mlock price to be? The current stock price wil be s (Round to the neacost cenc)

Answer 1

To determine the price per share for Babble, Inc., calculate the present value of the expected dividends and divide by the number of shares. Assuming a 15% discount rate, the stock price would be about $256,500 per share, considering the total present value of $51.3 million divided by 200 shares.

Step-by-step explanation:

In the scenario of Babble, Inc., investors will want to calculate the present value of expected dividends to determine what they should pay for a share of stock. The profits of $15 million immediately, $20 million in one year, and $25 million in two years will be paid out as dividends. These amounts must be discounted back to their present value using a chosen discount rate. Assuming a discount rate of 15%, the calculations would show how much future payments are worth in today's dollars.

After performing the present value calculations for each of the future dividends separately, you add up all the resulting present values. You then divide this total present value by the number of shares, which is 200 in this case. If the total present value of the profits is $51.3 million, then dividing this by the number of shares gives a value per share. The price per share will be approximately $256,500.

It's important to remember that in reality, expected profits and the appropriate discount rate are based on estimates and can fluctuate based on numerous factors.