Question

On January 1, 2017, Alison, Inc., paid $90,000 for a 40 percent interest in Holister Corporation’s common stock. This investee had assets with a book value of $247,000 and liabilities of $94,500. A patent held by Holister having a $6,000 book value was actually worth $52,500. This patent had a six-year remaining life. Any further excess cost associated with this acquisition was attributed to goodwill. During 2017, Holister earned income of $46,500 and declared and paid dividends of $16,000. In 2018, it had income of $57,200 and dividends of $21,000. During 2018, the fair value of Allison’s investment in Holister had risen from $102,400 to $104,480.

Answer 1

An investor would be willing to pay approximately $186,700 for each share of stock in Babble, Inc., based on the estimated future profits.

Step-by-step explanation:

The price that an investor would be willing to pay for a share of stock in Babble, Inc., can be calculated by determining the present value of the expected future profits. In this case, the expected profits are $15 million, $20 million, and $25 million for the next three years. We need to calculate the present value of these profits using a discount rate of 15% and then divide the total present value by the number of shares.

Using the present value formula, the present value of $15 million is $13.04 million, the present value of $20 million is $13.04 million, and the present value of $25 million is $11.26 million. Adding up these present values gives a total of $37.34 million. Dividing this by the 200 shares gives a price per share of approximately $186,700.

So, an investor would be willing to pay approximately $186,700 for each share of stock in Babble, Inc., based on the estimated future profits.