Question

On January 1, 2011, Ritter Company granted stock options to officers and key employees for the purchase of 10,000 shares of the company's $1 par common stock at $20 per share as additional compensation for services to be rendered over the next three years. The options are exercisable during a five-year period beginning January 1, 2014 by grantees still employed by Ritter. The Black-Scholes option pricing model determines total compensation expense to be $90,000. The market price of common stock was $26 per share at the date of grant. The journal entry to record the compensation expense related to these options for 2011 would include a credit to the Paid-in Capital—Stock Options account for

a. $0.
b. $18,000.
c. $20,000.
d. $30,000.

Answer 1

To determine what an investor would pay for a share in Babble, Inc., the present value of projected profits is calculated and divided by the number of shares, resulting in an estimated share value of $256,450.

Step-by-step explanation:

To compute the value of a share of stock in Babble, Inc., we need to calculate the present value (PV) of the expected profits using the prescribed interest rate of 15%. The PV of each year's profit is found using the formula PV = Future Value / (1 + interest rate)^number of periods. For Babble, Inc., we'll calculate the PV for profits right away (PV0), in one year (PV1), and in two years (PV2).

For the present profit of $15 million: PV0 = $15 million / (1 + 0.15)^0 = $15 million
For the profit in one year of $20 million: PV1 = $20 million / (1 + 0.15)^1 = $17.39 million
For the profit in two years of $25 million: PV2 = $25 million / (1 + 0.15)^2 = $18.90 million

We then add up all the present values to get the total: $15 million + $17.39 million + $18.90 million = $51.29 million. After dividing by the number of shares, 200, we find that each share's value is $51.29 million / 200 = $256,450 per share. This is the amount an investor would be willing to pay for a share of stock in Babble, Inc. given these profit expectations and the 15% interest rate.