Final answer:
An investor would calculate the price per share of Babble, Inc. by finding the present value of expected dividends and dividing by the number of shares. Given the expected profits and a 15% discount rate, the price per share would be about $256,500.
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 future dividends. The company is expected to pay out dividends of $15 million immediately, $20 million in one year, and $25 million in two years. Assuming a discount rate of 15%, the present value (PV) of these dividends can be calculated as follows:
- $15 million received right away does not need to be discounted.
- $20 million received in one year: $20 million / (1 + 0.15)¹ = $17.4 million
- $25 million received in two years: $25 million / (1 + 0.15)² = $18.9 million
The total present value of all dividends is therefore the sum of these three amounts, which equals $51.3 million. To find the price per share, we divide the total PV of the dividends by the number of shares (200), yielding a price per share of approximately $256,500.