Final answer:
To determine the price per share of Babble, Inc., the present value of future profits is calculated and then divided by the number of shares. Using a 15% discount rate and expected profits for the next two years, each of the 200 shares would be priced at approximately $256,500.
Step-by-step explanation:
When considering what an investor might pay for a share of stock in Babble, Inc., one needs to calculate the present value (PV) of the future profits that will be paid out as dividends. Since Babble, Inc. is expected to disband in two years, we have to consider the profits that will be paid right away ($15 million), in one year ($20 million), and in two years ($25 million), all while accounting for a discount rate, which reflects the time value of money. In this case, the discount rate is 15%. The present value for each of these amounts needs to be calculated separately because each is received at a different time. Once all the present values are calculated, they are added up to get the total present value of the company's profits.
To arrive at the price per share, we divide the total PV by the number of shares. With 200 shares of stock and a total PV of profits at $51.3 million, each share would be priced at $256,500. It's important to note that in practice, expected profits and the chosen discount rate can vary, adding a level of uncertainty to these calculations.