Final answer:
To determine the earnings per share from discontinued operations, calculate the Present Value of profits received at different times, sum them, then divide by the number of shares. In the example given, this results in $256,500 per share with an assumed interest rate of 15% and 200 shares.
Step-by-step explanation:
To find the earnings per share from discontinued operations, one must first understand the concept of Present Value (PDV). After calculating the PDV for different amounts received at various times using a chosen interest rate, such as 15%, you must sum all the present values to determine the total PDV of profits. Once you have this total, you divide it by the number of shares to find the earnings per share. In the example provided, the PDV of total profits is 51.3 million, and when divided by 200 shares, the earnings per share from the discontinued operations would be 0.2565 million, or $256,500 per share.
It's important to note that in real-world applications, the expected profits are often estimates rather than precise figures, and the choice of interest rates can significantly influence the PDV calculation.
Remember to also deduct any explicit and implicit costs from total revenues to establish the true economic profit, as demonstrated in an example where a $200,000 revenue minus $85,000 in explicit costs and $125,000 in implicit costs results in a negative economic profit of -$10,000 per year.