Final answer:
An investor would calculate the present value of expected dividends from Babble, Inc. to determine the value of a share. Assuming a required rate of return, the present values of the dividends are discounted and divided by the number of shares to find the share price.
Step-by-step explanation:
Stock Valuation for Babble, Inc.
When considering the value of a share of stock in Babble, Inc., an investor would determine the present value of expected dividends since the company plans to disband in two years. Given the profits (dividends) of $15 million now, $20 million next year, and $25 million the year after, one must discount these amounts back to their present values. Assuming a required rate of return (or discount rate) is known, the value of a share is the sum of these present values divided by the total number of shares. For example:
- Present Value of Immediate Dividends = $15 million / (1 + r)^0
- Present Value of Year 1 Dividends = $20 million / (1 + r)^1
- Present Value of Year 2 Dividends = $25 million / (1 + r)^2
Where r is the required rate of return. Without knowing r, we cannot calculate the exact price per share but this framework gives us an understanding of how to approach the valuation process.