Final answer:
When a new company issues stock, it's raising funds through equity financing. Investors buy shares of stock, and the net profit from each transaction is determined by the purchase cost, selling price, and transaction fees. In cases like Babble, Inc., expected profits and timing of dividends are key to valuating the share price.
Step-by-step explanation:
When a new company forms and issues stock, investors can purchase shares of stock to obtain partial ownership in the company. If the new company is offering 100 shares at $11 per share, the company is raising capital through equity financing. To calculate the net profit from each stock transaction, one must consider the initial purchase cost, the selling price, and any associated transaction fees.
Example Calculations:
- Initial purchase: 1000 shares of Nike at $24.50 per share. Sale price: $39.75 per share. Transaction fee: $9.99. Net profit = (Number of shares × (Selling price - Purchase price)) - Transaction fee.
- Initial purchase: 800 shares of Panda Express at $13.50 per share. Sale price: $23.25 per share. Transaction fee: $10. Net profit calculation follows the same formula as above.
- Initial purchase: 1200 shares of Wal Mart at $35.50 per share. Sale price: $58.75 per share. Transaction fee: $12.99. Net profit is calculated similarly.
For example, in the case of Babble, Inc., the expected profits and the disbursement timeline are critical in determining what an investor would pay for a share of the company. To estimate a fair price for a share of stock, dividend discount models or other valuation methods that account for the time value of money can be utilized.