Final answer:
Santa Fe Company's Year 1 activities led to a net income of 1,000. Babble, Inc.'s shares will be valued based on the present value of the expected dividends divided by the number of shares. Capital gains, along with dividends, contribute to an investor's expected rate of return on equity investments.
Step-by-step explanation:
The Santa Fe Company started operations by issuing common stock and raising capital. The company's financial activity during Year 1 involves earning cash revenues, paying cash expenses, and distributing a cash dividend. To assess what is true based on the provided information, we analyze the company's transactions.
Santa Fe Company began with cash of 9,100 from issuing common stock. It earned 5,150 in cash revenues, incurred 3,300 in cash expenses, and paid 850 as a cash dividend. To determine the net income, we subtract expenses (3,300) and dividends (850) from revenues (5,150), which gives us 1,000 as the Year 1 net income.
Regarding Babble, Inc., when determining the price investors may be willing to pay for shares, it is essential to consider the expected rate of return.
Since all profits are expected to be paid out as dividends, an investor would evaluate the present value of these dividend payments. If the profits are 15 million, 20 million, and 25 million over the next two years and are fully paid as dividends, the investor will calculate the present value of these dividends according to the expected rate of return and then divide by the number of shares to determine the price per share.
Considering capital gains, when a financial investor buys a share of stock and sells it later for a higher price, the profit made from this difference in purchase and sale price is known as a capital gain. This, along with dividends, is typically part of an investor's expected rate of return on equity investments.