Question

It is January 2nd and senior management of Baldwin meets to determine their investment plan for the year. They decide to fully fund a plant and equipment purchase by issuing 75,000 shares of stock plus a new bond issue. Assume the stock can be issued at yesterday s stock price ($35.91) and leverage changes to 2.7. Which of the following statements are true? Select all that apply. a. Working capital will remain the same at $14,417,761 b. Total liabilities will be $140,829,878 c. Baldwin will issue stock totaling $2,693,250 d. Total assets will rise to $220,312,314 e. The total investment for Baldwin will be $21,120,460

Answer 1

To determine what an investor may pay for a share of Babble, Inc., the present value of expected dividends ($15M immediately, $20M after one year, $25M after two years) would be calculated and divided by the number of shares (200). If discounted at an investor's required rate of return (e.g., 10%), the present value of each future dividend would be used to determine the total value one might be willing to pay for a share.

Step-by-step explanation:

To calculate the price an investor might be willing to pay for a share of stock in Babble, Inc., one would use the Present Value (PV) of the expected dividend payments. The company expects to make profits of $15 million right away, $20 million one year from now, and $25 million two years from now. These profits will be paid out as dividends to shareholders. Since there are 200 shares of stock, the dividends per share would be $75,000 immediately ($15 million / 200 shares), $100,000 after one year, and $125,000 after two years.

To find the PV of these dividends, investors would typically discount them at their required rate of return, which could be estimated by the cost of capital or by a rate that reflects the risk of the investment. To keep this simple and without specifying a discount rate, we could simply add these values to find the total value, but this would not account for the time value of money.

Let's assume the investor's required rate of return is 10%. The present value of the immediate dividend would be $75,000. The present value of next year's dividend would be $100,000 / (1 + 0.10) and the dividend two years from now would be $125,000 / (1 + 0.10)^2. The sum of these present values would give us the price an investor might be willing to pay for a share of stock.