Question

Company B began 2018 with a $110,000 balance in retained earnings.

The following events occurred during the year: Cash dividends of $18,500 were declared.
4,500 shares of callable preferred stock were recalled and retired for a price of $225 per share. The stock was originally issued for $150 per share.
Net income was $550,000. A material error in net income for a previous period was corrected. The correction of the error decreased retained earnings by $18,500 after a related income tax. The following is required:
1. Prepare the statement of retained earnings for the year ended 2013, and any note disclosures separately.
2. Discuss the restriction of retained earnings that the board of directors can impose and why it would be necessary.

Answer 1

An investor would calculate the present value of the future dividends that Babble, Inc. would pay out to determine the price they are willing to pay for a share. By discounting future dividends back to their present value and summing them up, an investor arrives at the share price they would pay today.

Step-by-step explanation:

To determine what an investor would pay for a share in Babble, Inc., we need to calculate the present value of the expected dividend payments. Given that Babble will make profits of $15 million immediately, $20 million one year from now, and $25 million two years from now, and all profits are paid as dividends, we can use this information to determine the value per share. Assuming the total number of shares is 200, the value per share can be calculated as follows: the present value of dividends to be received immediately ($15 million/200 shares), plus the present value of dividends to be received in one year ($20 million/200 shares, discounted back to present value), and the same for the dividends in two years ($25 million/200 shares, also discounted back to present value).