Final answer:
The question pertains to a rights offering and the value of each right for shareholders. Specifically, it involves calculating the PDV of the expected profits from Babble, Inc., which plans to disband in two years. Based on expected profits and a 15% discount rate, the price per share would be about $256,500.
Step-by-step explanation:
The question is related to a rights offering from a company and involves calculating the value of one right for existing shareholders. To determine the value of one right, one should understand the rights offering mechanism, which allows current shareholders to purchase additional shares at a specific price (subscription price), typically lower than the market value. The question about Babble, Inc. revolves around the valuation of a company's shares based on its expected profits and considering a specific interest rate for the present value calculation. Because the company will be disbanded in two years, an investor would pay a price per share that equals the present discounted value (PDV) of the future profits divided by the number of shares.
By performing the PDV calculations for the profits that Babble, Inc. expects to obtain immediately, in one year, and in two years, and discounting them at a 15% interest rate, one can find the cumulative present value. The PDV for all respective profits are calculated separately to reflect their different times of receipt. Once the total PDV is obtained, dividing it by the number of shares available (200) provides the price per share, which, in this case, is approximately $256,500 per share. This figure is highly theoretical and assumes a fixed profit projection and interest rate. In reality, investors consider various factors, including risk and alternative investment opportunities, which may affect the price they are willing to pay for a share of the stock.