Question

at january 1, 2025, whispering company's outstanding shares included the following. 270,000 shares of $50 par value, 8% cumulative preferred stock 937,000 shares of $1 par value common stock net income for 2025 was $2,535,000. no cash dividends were declared or paid during 2025. on february 15, 2026, however, all preferred dividends in arrears were paid, together with a 5% stock dividend on common shares. there were no dividends in arrears prior to 2025. on april 1, 2025, 486,000 shares of common stock were sold for $10 per share, and on october 1, 2025, 104,000 shares of common stock were purchased for $20 per share and held as treasury stock. compute earnings per share for 2025. assume that financial statements for 2025 were issued in march 2026.

Answer 1

An investor would pay approximately $256,500 for a share of Babble, Inc. by calculating the present value of the company's expected profits, which are $15 million, $20 million, and $25 million over the next two years, using a 15% discount rate, then dividing by the total number of shares, which is 200.

Step-by-step explanation:

To determine what an investor would pay for a share of stock in Babble, Inc., a company that plans to retire and disband in two years, we need to calculate the present value (PDV) of future profits discounted by a chosen interest rate. This approach is based on the assumption that all profits will be paid out as dividends to shareholders when they occur.

The company expects profits of $15 million presently, $20 million one year from now, and $25 million two years from now. Assuming a 15% interest rate for the discount, separate PDV calculations must be performed for each time period's profits. The sum of these present values represents the total value to shareholders.

Once the PDV of total profits is determined, we divide this by the number of shares, 200 in this case, to find the price per share. If the PDV of total profits is $51.3 million, the price per share would be $256,500.

It's important to recognize that in reality, predicted profits are estimates and not guaranteed figures, and the choice of discount rate reflects the risk associated with the investment.