Final answer:
To find the current value of a share of stock in Babble, Inc., one must calculate the present discounted value of the expected future dividends and the repurchase amount, using a discount rate of 12 percent and then divide by the number of shares.
Step-by-step explanation:
The question involves the application of Present Discounted Value (PDV) to determine what an investor would be willing to pay for a share of stock in a company. Babble, Inc. is expected to pay dividends of $15 million immediately, $20 million after one year, and $25 million after two years, with the company being disbanded thereafter. As the company will repurchase all outstanding shares at a price of $50 per share five years from now, we need to calculate the present value of all future payments using a given discount rate, which in this case is 12 percent.
To compute the PDV, we discount the amounts expected to be received at each time period back to their present value and then sum these values. We also need to consider the final repurchase amount for the stock. Once we have this total present value, we divide it by the number of shares to find the price per share that an investor would pay. The discount rate selected can have a significant impact on Present Discounted Value calculations, and while in this example, the profits are given, it is important to remember that in reality, profits are only estimates.