Final answer:
To value a share of the stock of Babble, Inc., one must calculate the present value of expected future dividends by discounting them at the required rate of return and then divide this total present value by the number of shares. Using a 15% discount rate, the calculated price per share is approximately $256,500, but this can vary based on the discount rates and the actual profits realized.
Step-by-step explanation:
The value of a share of stock in Babble, Inc. can be determined by calculating the present value (PV) of the expected dividend payments. Given that the profits are paid as dividends over the next two years until the company is disbanded, we need to calculate the present value of those dividends discounted by the required rate of return. In this case, if an investor requires a 15% return, we will discount the immediate $15 million profit, the $20 million profit one year from now, and the $25 million profit two years from now by the required return rate to obtain their present value.
To calculate the present value of each dividend payment, we can use the formula: PV = Future Value / (1 + r)^t, where 'r' represents the required rate of return and 't' represents the number of years in the future the payment is received. Once we calculate the PV for each of the profit amounts for their respective years, we can sum up all the present values to get the total PV of the dividends. Finally, this total PV is divided by the number of shares to obtain the price per share. For Babble, Inc., assuming the company has 200 shares, the calculation would yield an approximate price per share of $256,500.
It is important to note that such valuation is based on expected profits, which in the real world can vary from estimates. Moreover, different investors may use different required rates of return (discount rates) based on their risk assessment of the investment, which would alter the stock valuation.