Final answer:
The question requires calculating the present value of expected future profits and then determining the share price by dividing this value by the number of shares. Using a 15% discount rate, and assuming total present value calculations have been completed, the price per share can be derived from dividing the total PDV of profits by the number of shares.
Step-by-step explanation:
The question is about determining what an investor would pay for a share of stock in a company with expected profits being paid out as dividends over a specific period. In this scenario, we consider a company named Babble, Inc. that is expected to disband in two years and plans to pay out its profits as dividends when they occur. Calculating the present value (PDV) of these profits using a discount rate, which in this example we can assume to be 15%, allows us to understand what these future amounts are worth in today's terms.
First, calculate the PDV for each year's profit separately and then sum them to find the total PDV of all future profits. To find the price per share, we divide this total PDV by the number of shares offered by the company, which is 200 in this example. For instance, if the total PDV was $51.3 million, dividing by 200 shares would result in a value of $256,500 per share. It's essential to recognize that in reality, expected profits are estimates and not definitive figures, and the choice of discount rate, 15% in our example, affects the valuation significantly.