Question

Plateau, incorporated, pays a dividend of $2.00 per share every other year with the last payment having just been paid. five years from now, the company is repurchasing all of the outstanding shares at a price of $50 per share. what is the current value of one share at a discount rate of 12 percent?

A) $33.78
B) $34.03
C) $27.89
D) $34.99
E) $31.24

Answer 1

To find out what an investor would pay for a share of Babble, Inc., we calculate the present discounted value of the dividends expected from the profits it generates. Using a 15% interest rate, we find PDV for each profit amount for the next two years. We then divide this total by the number of shares (200) to determine the price per share.

Step-by-step explanation:

To determine what an investor would pay for a share of Babble, Inc., we must calculate the present discounted value (PDV) of the expected future dividends. Given the profits are $15 million immediately, $20 million one year from now, and $25 million two years from now, and that these profits will be distributed among the 200 shares as dividends, we first calculate the PDV for each of these amounts using a 15% interest rate.

First, the PDV of $15 million is just the face value since it is paid immediately. For the next two years, the formula for PDV is PDV = F / (1 + r)^n where F is the future payment, r is the discount rate (interest rate), and n is the time in years until payment. Hence, the PDV for $20 million after one year is $20 million / (1 + 0.15)^1, and for $25 million after two years is $25 million / (1 + 0.15)^2.

Add up all the present values and divide by 200 shares to find the price per share. Note that this example assumes the profit numbers are certain, and in the real world, an investor would consider these profits as estimates rather than guaranteed amounts.