Question

This year, GHJ, Incorporated received the following dividends:

1. BP, Incorporated (a taxable California corporation in which GHJ holds a 3% stock interest): $22,100
2. MN Corp (a non-taxable U.S. corporation in which GHJ holds a 5% stock interest): $12,000

Answer 1

The question from the student relates to dividends received by GHJ, Incorporated and how much an investor might be willing to pay for shares in Babble, Inc. based on future profits paid as dividends. We examine the importance of percent of the profits in determining the value of a stock and how dividend yields have changed over time according to historical financial data.

Step-by-step explanation:

The student has presented a scenario involving GHJ, Incorporated, which has received dividends from two different corporations. To determine an investor's willingness to pay for a share of stock in a company like Babble, Inc., we must consider the future profits that will be paid out as dividends to shareholders and how these dividends contribute to the total return on investment in the stock market.

Percent of the profits play a crucial role as they represent the portion of a company's earnings distributed to shareholders. Since Babble, Inc. plans to disband in two years and has projected profits of $15 million immediately, $20 million next year, and $25 million in the second year, we need to calculate the present value of these profits to determine the price an investor might pay for a share today.

According to historical data from LibreTexts and other financial databases, dividend yields have varied over time. We know from history that from the 1950s to the 1980s, dividends accounted for approximately 4% of a stock's value, while more recently, they have been closer to 1% to 2%. This change indicates a shift in the balance between capital gains and dividends earned by investors over the decades.