Question

Black and Shannon have decided to form a partnership. They have agreed that Black is to invest $360,000 and that Shannon is to invest $120,000. Black is to devote one-half time to the business, and Shannon is to devote full time. The following plans for the division of income are being considered: Equal division In the ratio of original investments In the ratio of time devoted to the business Interest of 6% on original investments and the remainder equally Interest of 6% on original investments, salary allowances of $96,000 to Black and $168,000 to Shannon, and the remainder equally Plan (e), except that Shannon is also to be allowed a bonus equal to 20% of the amount by which net income exceeds the total salary allowances

Answer 1

To value Babble, Inc. shares, the present value of future dividends is calculated using a hypothetical 10% discount rate. Given the expected profits and dividend distribution, an investor might be willing to pay approximately $269,214.88 per share. However, the actual value will depend on the investor's chosen discount rate.

Step-by-step explanation:

To calculate the value per share that an investor would be willing to pay for Babble, Inc., we need to determine the present value of the dividends the investor will receive. The company will be disbanded in two years, which means all profits will be paid as dividends at three distinct points in time: $15 million right away, $20 million one year from now, and $25 million two years from now. As the company is issuing 200 shares, we divide the dividend amounts by the number of shares to get the dividend per share.

Assuming an investor uses a discount rate to value these future dividends, let's choose a discount rate of 10% for the sake of this example. Using the present value formula:

• Present value of immediate dividend: $15,000,000 / 200 = $75,000 per share
• Present value of dividend in one year: ($20,000,000 / 200) / (1 + 0.10) = $90,909.09 per share
• Present value of dividend in two years: ($25,000,000 / 200) / (1 + 0.10)² = $103,305.79 per share

Adding these figures together gives the total value per share that an investor would be willing to pay today:

Total value per share = $75,000 + $90,909.09 + $103,305.79 = $269,214.88

It is important to note that in real-world scenarios, the choice of discount rate can significantly affect the valuation and would be based on the investor's required rate of return or the cost of capital.