Final answer:
The 2018 basic earnings per share for Flyaway Travel Company is approximately $1.85. This is calculated by subtracting preferred dividends from net income and dividing by the weighted average number of common shares outstanding. For Babble, Inc., an investor would base the share price on the present value of expected dividends.
Step-by-step explanation:
To calculate the 2018 basic earnings per share (EPS) for Flyaway Travel Company, we must follow a specific formula. EPS is determined by subtracting preferred dividends from net income and then dividing by the weighted average number of common shares outstanding. Flyaway reported a net income of $90,000 for 2018. They paid $2,125 in cash dividends on its non-convertible preferred stock and $10,000 in dividends on its common stock. However, only preferred dividends are subtracted from net income for EPS calculations.
To calculate the weighted average of shares outstanding, we note that Flyaway had 40,000 common shares for three months and an additional 10,000 shares for the remaining nine months of the year. The calculation is ((40,000 × 3/12) + (50,000 × 9/12)), which equals 47,500 weighted average shares outstanding for the year. Therefore, the EPS calculation for 2018 would be ($90,000 - $2,125)/47,500, which equates to an EPS of approximately $1.85.
Regarding the question about Babble, Inc., the company expects profits which will be paid out as dividends. An investor would likely pay for a share based on the present value of the expected dividends. Given that Babble is expected to pay out $15 million, $20 million, and $25 million in dividends over the next two years and is selling 200 shares, the price per share will depend on how an investor values future dividends, often using a discounted cash flow analysis.