Question

Melissa is the sole shareholder of Cupcake Surprises, Inc. (CSI) and sells 25% of the company stock to an ESOP for $550,000. Melissa had an adjusted basis in the CSI stock of $100,000. Provided Melissa reinvests the $550,000 in qualified replacement securities, she will not be required to recognize any capital gain.

Answer 1

To determine the price of a share of stock in Babble, Inc., we need to calculate the present value of the expected future dividends.

Step-by-step explanation:

To determine the price an investor would pay for a share of stock in Babble, Inc., we need to calculate the present value of the expected future dividends. Given that the profits are $15 million, $20 million, and $25 million in the present, one year from now, and two years from now respectively, and all profits will be paid out as dividends, we can determine the present value by discounting the future dividends. Using an appropriate discount rate, we can calculate the present value of each dividend and then sum them up to find the total present value. Finally, we divide the total present value by the number of shares (200) to determine the price an investor would pay for a share of stock in the company.