Final answer:
Marly Co. needs to allocate the bond proceeds between the bonds and the warrants based on their fair values. Without the correct answer choice available from the provided options, this cannot be resolved accurately. For Babble Inc., the share price would be determined by calculating the present value of expected dividends, but a specific discount rate is needed to complete the calculation.
Step-by-step explanation:
When Marly Co. issued bonds with detachable stock warrants, the company needed to allocate the proceeds between the bonds and the warrants based on their relative fair values.
Since the bonds without the warrants would sell at 96, or $960 per $1,000 bond, and the total issue with the warrants sold for 103, or $1,030 per $1,000 bond, the premium attributable to the warrants can be calculated by subtracting the bond value without warrants from the total proceeds received per bond.
The fair value of the warrants is given as $2 each, and there are 20 attached to each $1000 bond, totaling $40 in fair value per bond ($2 * 20).
Thus, the allocation of the premium to the warrants is $1,030 (issue price) - $960 (bonds without warrants) = $70 per bond, and then the fair value of the warrants ($40) should be used to allocate the premium between the bonds and the warrants. Therefore, for the entire issue: $40 (fair value of warrants per bond) / $70 (total premium per bond) * $500,000 (total issue) = $285,714 paid for the warrants.
The remainder of the premium, $214,286, would be allocated to the bonds. However, since the possible answers provided are not reflective of the calculation made, it appears there may be an error in the question or the answer choices given.
In the case of Babble, Inc., the determination of what an investor will pay for a share of stock involves calculating the present value of the expected dividends. Investors will expect a certain rate of return on their investment. The dividends are paid out as follows: $15 million immediately, $20 million one year from now, and $25 million two years from now.
Assuming an investor requires a discount rate to account for the time value of money and risk, the present value of each dividend can be calculated and summed up to determine how much an investor would pay for the entire company.
Dividing this total by the number of shares (200) would give the price per share. For example, if an investor required a 10% return: the present value of the dividends would be $15M/1.0 + $20M/1.1 + $25M/(1.1)^2. The total present value would then be divided by 200 to find the price per share. Calculating the exact share price requires the discount rate, which is not provided in the information.