Final answer:
The current stock yield for Cremer Incorporated is 6.6%, and to determine what an investor will pay for a share of Babble, Inc., one must calculate the present value of future dividends and divide the total PV by the number of shares to find the price per share. Therefore, the correct option is C.
Step-by-step explanation:
To calculate the stock yield to the nearest tenth of a percent for Cremer Incorporated, which receives a dividend of $5.23 per share with a stock price of $78.81, use the following formula:
Dividend Yield = (Dividend per Share / Price per Share) × 100%
By plugging the given numbers into the formula, we have:
Dividend Yield = ($5.23 / $78.81) × 100% = 6.63%
Therefore, the current stock yield for Cremer Incorporated is 6.6%, which matches answer choice (c).
Now considering Babble, Inc., which will distribute dividends from its profits of $15 million, $20 million, and $25 million over three respective years, an investor would first calculate the present value (PV) of each dividend payment using the formula:
PV = Future Value / (1 + Interest Rate)^n
Where n is the number of years until the payment is received. Assuming an interest rate of 15%, the calculations for present value would be as follows:
- PV of $15 million for Year 0 (present) is $15 million
- PV of $20 million for Year 1 is $20 million / (1 + 0.15)^1
- PV of $25 million for Year 2 is $25 million / (1 + 0.15)^2
After calculating the PV for each year, the investor would add them together to get the total PV of the dividends, then divide by the number of shares:
Total PV = PV Year 0 + PV Year 1 + PV Year 2
Price Per Share = Total PV / Number of Shares
This yields an estimated price an investor would pay for a share of Babble, Inc.