Question

Kevin purchases 1,000 shares of Bluebird Corporation stock on October 3, 2019, for $400,000. On December 12, 2019, Kevin purchases an additional 750 shares of Bluebird stock for $280,000. According to market quotations, Bluebird stock is selling for $400 per share on 12/31/19. Kevin sells 500 shares of Bluebird stock on March 1, 2020, for $224,000.

Answer 1

The question involves calculating the value of a share of stock for Babble, Inc. given the future profits and dividends. Using the Dividend Discount Model, future dividends are discounted to their present value to determine the price an investor would pay for a share.

Step-by-step explanation:

The question at hand involves a hypothetical scenario concerning Babble, Inc., a company that offers speaking lessons and is planning to disband in two years. The task is to determine what an investor would pay for a share of Babble's stock, given the anticipated profits and payout schedule. To calculate the value of a share of stock in this situation, one would use a model such as the Dividend Discount Model (DDM), which suggests that the value of a stock is the sum of all future dividends, discounted back to their present value. As there are 200 shares of stock and the profits are distributed as dividends, for each share, an investor would receive \$15 million/200 immediately, \$20 million/200 one year from now, and \$25 million/200 two years from now. These amounts then need to be discounted to reflect the time value of money and determine the share price an investor is willing to pay in the present.