Question

Indicate the procedure for recording the issuance of 10,000 shares of $10 par value common stock for a patent for Marlowe Company, in various circumstances: Marlowe cannot readily determine the fair value of the stock nor the fair value of the patent. An independent consultant values the patent at $125,000 based on discounted expected cash flows

Answer 1

To figure out the share price for Babble, Inc., calculate the present value of expected profits using a 15% discount rate. Then, divide the total present value by 200 shares to find that the price per share is approximately $256,500.

Step-by-step explanation:

To determine the price per share for Babble, Inc., one must calculate the present value (PV) of the future profits and then divide by the number of shares. In this scenario, profits are expected to be $15 million immediately, $20 million in one year, and $25 million in two years. Assuming a 15% interest rate, the present value of each profit should be calculated separately. After adding up these present values, the price per share is determined by dividing the total present value by the number of shares, which is 200. Therefore, based on the given discounted cash flows, the price per share would be about $256,500 per share.