Final answer:
An investor would pay for a share of stock in Babble, Inc. by calculating the present value of future dividends expected to be paid out before the company is disbanded. Without a discount rate, we cannot specify the share price, but it would be determined by summing the present values of the $15 million, $20 million, and $25 million payouts and dividing by the 200 shares.
Step-by-step explanation:
Considering the scenario provided for Babble, Inc., an investor would calculate the present value of the future dividends to determine how much they would pay for a share of stock in the company. Since the company plans to pay out dividends of $15 million immediately, $20 million in one year, and $25 million in two years before it is disbanded, we need to discount these future payments to their present value to understand what an investor might pay for a share today.
To find the present value of each dividend payout, we would use a discount rate (assumed to be the investor's required rate of return). If the discount rate is not provided, we cannot calculate the precise value of the stock. However, the theoretical share price would be the sum of the present values of all expected dividends paid out over the next two years, divided by the total number of shares, which is 200 in this case.
For example, if the required rate of return (discount rate) is 10%, the present value of the immediate $15 million dividend payment is $15 million (since it does not need to be discounted). The present value of the year one $20 million would be: $20 million / (1 + 0.10)^1. The present value of the year two $25 million would be: $25 million / (1 + 0.10)^2. These values would then be summed and divided by the number of shares to find the price per share.