Final answer:
An investor would pay approximately $256,500 per share of Babble, Inc. stock, based on the present value of expected profits over two years discounted at a 15% rate, with the company's anticipated disbandment and given dividends are paid out as they occur.
Step-by-step explanation:
To calculate what an investor would pay for a share of stock in Babble, Inc., we need to consider the present value of the expected profits. Babble, Inc. anticipates profits of $15 million in the present, $20 million one year from now, and $25 million two years from now, with a planned disbandment after two years. An investor will calculate the present value (PV) of these profits separately for each time period using a discount rate, which is typically related to the interest rate or required rate of return. After obtaining the total present value of all future profits, we divide this number by the total number of shares to find the price per share an investor is willing to pay.
Assuming the required rate of return is 15%, we calculate the present value of each expected profit and then sum them all to determine the total present value of the company's profits. Finally, we divide this total present value by the number of shares (200 in this case) to find out the price per share. According to the calculations given, the price per share would be approximately $256,500 per share, considering all dividends are paid out as they occur and assuming a 15% discount rate.