Final answer:
To calculate what an investor would pay for a share of stock in Babble, Inc., present value calculations are used for the expected dividends at a discount rate of 15%. The total present value is then divided by the number of shares, resulting in a price per share of approximately $256,500. This figure is an estimation based on assumed profits and discount rate.
Step-by-step explanation:
When determining what an investor will pay for a share of stock in Babble, Inc., it is essential to calculate the present value of the expected dividends. Babble, Inc., is expected to make profits of $15 million immediately, $20 million one year from now, and $25 million two years from now, with all profits paid out as dividends when they are received. To find the price per share, one must conduct a present value (PDV) calculation for each of the dividend payments, assuming a 15% interest rate, and then sum up those present values.
Once the total PDV is calculated, it is divided by the number of shares, which is 200 in the case of Babble, Inc. Based on the PDV calculations provided, the total PDV is $51.3 million. Dividing this number by the number of shares yields $0.2565 million, or approximately $256,500 per share.
It is important to note that in a real-world context, expected profits are projections and the discount rate used in the PDV calculation is subject to the investor's required rate of return.