Question

XYZ Corporation is expected to pay a $2.00 per share cash dividend to owners of their common stock one year from today. The dividends are paid annually, and are expected to remain at this $2.00 per share level forever. The appropriate discount rate, given the risk of the stock, is E[r] = 10%EAR.

Answer 1

To determine the price an investor would pay for a share of stock in Babble, Inc., we can calculate the present value of the expected dividends using the appropriate discount rate. An investor would pay $20.00 for a share of stock in Babble, Inc.

Step-by-step explanation:

To determine the price an investor would pay for a share of stock in Babble, Inc., we need to calculate the present value of the expected dividends. In this case, the company is expected to pay out profits of $15 million, $20 million, and $25 million in each of the next three years, respectively. The appropriate discount rate is given as 10% EAR. Using the formula for present value of a perpetuity, we can calculate the present value of the expected dividends.

The present value (PV) can be calculated as PV = D / r, where D is the annual dividend and r is the discount rate. In this case, D is $2.00 per share and r is 10% EAR. Therefore, PV = $2.00 / 10% = $20.00. So, an investor would pay $20.00 for a share of stock in Babble, Inc.

Please note that this calculation assumes the $2.00 per share dividend will remain constant indefinitely.