Final answer:
An investor would pay for a share of Babble, Inc. stock based on the present value of expected dividends, which include $15 million now, $20 million in one year and $25 million in two years, divided by the number of shares (200).
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 dividends, as all profits are paid out as dividends. The expected profits are $15 million immediately, $20 million one year from now, and $25 million two years from now. The company has 200 shares of stock, so we divide the profits by the number of shares to find the dividends per share. Present value calculations will be used to discount the future dividends back to their current values. Then we sum up these present values to find the total value of a share today.
Using a dividend discount model approach and depending on the required rate of return by the investors (which is not provided in the question), the price an investor would pay for a share could vary. If the required rate of return is known, we would use the formula:
Present Value of Dividend (PV) = Dividend / (1 + required return)year
We would perform this calculation for each expected dividend and sum those present values to estimate the stock's current value per share. A dividend discount model would be used to discount future dividends to their present value considering the investor's required rate of return.