Final answer:
To determine the price of a share of stock in Babble, Inc., we can use the present value of a growing perpetuity formula. Assuming a required rate of return of 10% and expected dividends of $20 million in one year, the price of a share of stock would be $200 million.
Step-by-step explanation:
To determine the price of a share of stock in Babble, Inc., we need to calculate the present value of future dividends. In this case, the company is expected to pay dividends of $15 million now, $20 million after one year, and $25 million after two years. Since all profits will be paid out as dividends, we can use the formula for the present value of a growing perpetuity to calculate the price of a share of stock.
The formula for the present value of a growing perpetuity is:
Price = Div1 / (r - g)
Where Div1 is the dividend one year from now, r is the required rate of return, and g is the growth rate of dividends.
Let's assume the required rate of return is 10%:
Price = $20 million / (0.10 - 0.20)
Price = $20 million / (-0.10)
Price = $200 million
Therefore, an investor will pay $200 million for a share of stock in Babble, Inc.