Question

A. A corporation plans to pay a dividend of $4.50 at the end of the year. The dividend is then expected to grow at 15% for one year, at 17% for one year and then settle down to a long run growth rate of 6%. If investors require a return of 11% to hold the stock, what price should the stock sell for?

B. A project is projected to cost $2,000,000 to undertake. It will generate positive cash inflows as follows: Year 1 - $750,000; Year 2 – 240,000; Year 3 - $375,000; Year 4 – 950,000; Year 5 – 978,000. What is the project’s payback?
C . A project is projected to cost $2,000,000 to undertake. It will generate positive cash inflows as follows: Year 1 - $750,000; Year 2 – 240,000; Year 3 - $375,000; Year 4 – 950,000; Year 5 – 978,000. What is the project’s Profitability Index, given a 7% required rate of return??

Answer 1

The price an investor would pay for a share of stock from Babble, Inc. is found by discounting future dividends to their present value using a 15% discount rate. The dividends are $15 million now, $20 million in one year, and $25 million in two years. The calculated price per share is approximately $256,500.

Step-by-step explanation:

We can determine the value of a stock from Babble, Inc. by discounting the expected dividends to their present value, assuming a required rate of return, known as the discount rate. This is due to the anticipation of a capital gain or dividend by investors. Given the founder's retirement and disbandment of the company, all profits are expected to be paid out as dividends. Thus, this value can be calculated using the present value of an annuity formula for each dividend period.

To calculate the present value for the profits as dividends, for $15 million (present), $20 million (1 year later), and $25 million (2 years later) with a 15% interest rate:

• Present value of the first year dividend (received immediately) is $15 million.
• Present value of the second year dividend is $20 million / (1 + 0.15).
• Present value of the third year dividend is $25 million / (1 + 0.15)^2.

After calculating these individual present values, they are summed up, and the total is then divided by the number of shares to find the price per share. Hence, an investor would pay approximately $256,500 per share of Babble, Inc. stock.