Final answer:
The current value of the firm's common stock is calculated by dividing the present discounted value of expected profits by the number of outstanding shares. With a PDV of $51.3 million and 200 shares, the theoretical price per share would be $256,500, considering a 15% interest rate.
Step-by-step explanation:
To calculate the current value of the firm's common stock, we must first find the present value (PV) of the expected profits, taking into account a discount rate which is often represented by the required rate of return or interest rate. In this scenario, the interest rate is 15%.
This process is also known as the present discounted value (PDV) calculation.
After finding the PDV of the expected profits over the relevant time periods, we divide this total by the number of shares outstanding to find the value per share.
If the PDV of total profits is $51.3 million and there are 200 shares, we calculate the price per share as follows: 51.3 million / 200 = 0.2565 million, or $256,500 per share, when rounded to the nearest cent.
This figure represents the price per share, which is understood to be a theoretical value based on estimated future profits and discount rates.
It's important to keep in mind that these projections are based on forecasts and may not be hard facts.
Therefore, the calculated value per share is subject to changes based on actual performance and market conditions.
Furthermore, the chosen interest rate has a significant impact on the PDV and, consequently, the estimated stock value.