Final answer:
To calculate the price of a share today for ABC Ltd, which will pay a future dividend expected to grow at a constant rate, we use the Gordon Growth Model, discounting future dividends to present value using the required rate of return.
Step-by-step explanation:
The question involves calculating the present value of a share of stock in ABC Ltd, considering the company's expected future dividend payments and growth rate. To find the stock price today, we would use the Gordon Growth Model, which assumes a company will start paying a dividend in the future that will grow at a constant rate indefinitely. Since ABC Ltd will pay a $2.00 dividend in 3 years and it is expected to grow at a rate of 6% annually, while the required rate of return is 12%, we discount these future cash flows back to the present value using the required rate of return to calculate the stock's value today. The formula we would use is: Present Value of Stock = D1 / (k - g), where D1 is the value of the next year's dividends, k is the required rate of return, and g is the growth rate in dividends.
To apply this to particularly find out the price of a stock that will pay a certain dividend in the future, such as in Babble, Inc.'s scenario with a clear timeline of profits and disbandment, we can value each dividend payment at the present value separately and sum them up to get the total price an investor might pay for the share.