Final answer:
The earning per share for a company is determined by dividing the total present discounted value of expected profits by the number of shares outstanding. For Babble, Inc., with expected profits at different points in time, the total PDV would be divided by 200 shares to arrive at the price per share, illustrating what an investor might pay for each share.
Step-by-step explanation:
To calculate the earning per share (EPS) of a company, you divide the company's profits by the number of shares outstanding. For instance, to find the EPS for Babble, Inc., you first need to calculate the present discounted value (PDV) of the expected profits at different times, using the chosen interest rate of 15%. Once you have the total PDV, you divide this number by the total number of shares to obtain the EPS.
In the case of Babble, Inc., with the expectation of profits being $15 million right now, $20 million one year from now, and $25 million two years from now, an investor would need to calculate the PDV for each of these profit amounts and then add them together. After obtaining the total PDV, to find out what an investor would pay for a share of stock, or effectively the 'price per share', divide the total PDV by the number of shares, which is 200 in this scenario. For example, if the total PDV was $51.3 million, the calculation would be $51.3 million divided by 200 shares, resulting in approximately $0.2565 million or $256,500 per share.