Final answer:
To determine the price per share an investor would pay for Babble, Inc., the present value of future profits is calculated and divided by the number of shares. The projected profits at various times are discounted at a 15% interest rate, summed up, and then divided by 200 shares, giving a price per share of approximately $256,500.
Step-by-step explanation:
The question is related to the valuation of a company's shares based on expected profits and dividend payouts. To calculate what an investor would pay for a share of stock in Babble, Inc., a company that offers speaking lessons, one needs to consider the profits that the company expects to make in the future and the timing of these profits. The profits are projected to be $15 million immediately, $20 million one year from now, and $25 million two years from now. All profits will be paid as dividends. When valuing these future payments, we apply a concept known as the present value, discounted at a chosen interest rate, which in this case is 15%.
To find the present value (PV) of future profits, a different present value calculation is performed for each time period. Once we have the present values, they are added up to get the total present value of the company's profits. The total present value (PV) is then divided by the number of shares to determine the price per share. In Babble, Inc.'s case, with a total present value of profits at $51.3 million and 200 shares, the calculation would be $51.3 million divided by 200, resulting in a price per share of approximately $256,500.