Question

Titanic Corporation’s net income for the year is $450,000. On June 30, a $0.75 per-share cash dividend was declared for all common stockholders. Common stock in the amount of 38,000 shares was outstanding at the time. The market price of Titanic’s stock at year end is $18 per share. Titanic had a $1,100,000 credit balance in retained earnings at the beginning of the year.

Answer 1

To calculate the price per share of Babble, Inc., investors would discount the expected dividend payouts back to their present value and divide by the number of shares. The sum of these present values represents the total value to be shared among the shareholders. The discount rate required for this calculation is not provided but is an essential component of the present value formula.

Step-by-step explanation:

Understanding Share Valuation of Babble, Inc.

To determine the value of a share of stock in Babble, Inc., investors would look at the present value of the expected dividend payouts. Since the company plans to pay dividends equal to its profits at the end of each year, the present value of these dividends would be calculated and then divided by the number of outstanding shares to find the price per share.

The present value of future dividends needs to be calculated for each of the three years: $15 million immediately, $20 million in one year, and $25 million in two years. Assuming a required rate of return or discount rate, the present values of these dividends would be summed to find the total present value of the payouts to investors. Dividing this sum by the number of shares (200 in this case), would give the value of each individual share.

Without the discount rate, the calculation cannot be completed. However, if an investor were given the discount rate, they would then use the formula for present value of a cash flow: PV = CF / (1+r)^t, where PV is the present value, CF is the cash flow in each period, r is the discount rate, and t is the time in years to the cash flow.