Final answer:
The expected return on a stock is calculated by adding the price increase to dividends and then dividing by the initial stock price. For Babble, Inc., the value of a share depends on the present value of future profits, which are known and will be paid out as dividends.
Step-by-step explanation:
The expected return on a stock is determined by the potential increase in price, known as capital gains, and any dividends issued. To calculate this for a stock priced at $50 with a projected selling price of $55 and a $1 dividend, you add the projected price increase ($5) to the dividend ($1) and then divide the sum ($6) by the initial stock price ($50). This calculation yields an expected return of 12.00%. Therefore, the correct answer would be d. 12.00%.
When considering the hypothetical company, Babble, Inc., with its expected profits and dividend payouts over the next two years before it is disbanded, an investor would need to calculate the present value of the future dividend payouts to determine what to pay for a share of stock. The calculation would involve discounting the future profits of $15 million, $20 million, and $25 million at the investor's required rate of return to present value terms and then dividing by the number of shares, which is 200, to find the price per share.