Answer:
An investor would pay for a share of stock in Babble, Inc. by calculating the present value of expected dividends paid out by the company. The dividends per share over the next two years should be discounted to present value using a chosen discount rate. The sum of these present values would represent what an investor is willing to pay for a single share of stock.
Step-by-step explanation:
To determine what an investor would pay for a share of stock in Babble, Inc., we need to calculate the present value of the expected dividends, which are the cash flows from the company to the shareholders. The company expects to pay out dividends of $15 million immediately, an additional $20 million one year from now, and $25 million two years from now. As there are 200 shares of stock, the dividend per share will be $75,000 immediately ($15 million / 200), $100,000 after one year ($20 million / 200), and $125,000 after two years ($25 million / 200).
To find the present value of these dividends, we must discount them to the present using a discount rate. The discount rate is the investor's required rate of return for investing in the company. If we assume a discount rate (also known as the required return or cost of equity), we can calculate the present value of the dividends using the formula for present value of a cash flow: PV = Cash Flow / (1 + r)^n, where PV is present value, r is the discount rate, and n is the number of periods until the cash flow is received.
Assuming a discount rate, each future dividend payment is then discounted back to its present value. These present values are then summed to obtain the total present value of all dividends, which represents the price an investor would be willing to pay for one share today.