Question

Island Corporation provides low-cost food delivery services to senior citizens. At the end of the year on December 31, 2024, the company reports the following amounts: In addition, the company had common stock of $38,000 at the beginning of the year and issued an additional $3,800 during the year. The company also had retained earnings of $18,000 at the beginning of the year.

Answer 1

To calculate the price an investor will pay for a share of stock in Babble, Inc., use the dividend discount model (DDM) to determine the present value of expected future dividends. Assuming a 10% discount rate, the stock price would be $49,873,045.77.

Step-by-step explanation:

To calculate the price an investor will pay for a share of stock in Babble, Inc., we need to determine the present value of the expected future dividends. Since all profits are paid out as dividends immediately, we can use the dividend discount model (DDM) to calculate the share price. The DDM formula is:

Stock Price = Dividend / (1 + r) + Dividend / (1 + r)^2 + Dividend / (1 + r)^3 + ...

where r is the discount rate. In this case, the dividends are $15 million, $20 million, and $25 million for the present, one year from now, and two years from now respectively. Assuming a discount rate of 10%, the stock price can be calculated as follows:

• Stock Price = $15,000,000 / (1 + 0.10) + $20,000,000 / (1 + 0.10)^2 + $25,000,000 / (1 + 0.10)^3
• Stock Price = $13,636,363.64 + $16,528,925.62 + $19,707,756.51
• Stock Price = $49,873,045.77