Final answer:
To value the shares of Babble, Inc., the present value of future profits is calculated using a 15% discount rate. These values are added together and divided by the total number of shares to determine the price per share that an investor might be willing to pay.
Step-by-step explanation:
The question is related to the valuation of a company named Babble, Inc. based on its expected future profits and how this information affects the price per share an investor might pay. To determine the present value (PV) of the expected profits, a discount rate of 15% is used because future cash flows are less valuable than current ones due to the time value of money. The present value calculations must be performed for each expected profit at different times, then added together. After finding the total present value of the profits, this amount is divided by the number of shares to find how much an investor would pay per share.
To calculate the share price, you would calculate the present value of $15 million (present profit), $20 million (one year from now), and $25 million (two years from now) using a 15% discount rate. Then, sum these present values, and divide by 200 shares to get the price per share. Consequently, the dividends paid to shareholders would equal the profits as they are paid out in their entirety as dividends as they occur.