Final answer:
The question pertains to estimating the current share price of Ramada using a model that discounts future dividends back to their present value. By applying the Dividend Discount Model (DDM) and considering varying growth rates, the share price can be calculated by summing up the present values of all future dividends. The given example of Babble Inc. is a simplified scenario illustrating the concepts of dividend valuation in stock investments.
Step-by-step explanation:
The student is asking about the calculation of the current share price for Ramada, a company with special patent rights and expected growth rates. To estimate the share price, we utilize the Dividend Discount Model (DDM), which takes future dividends and discounts them back to their present value. Ramada is expected to have a high growth phase for three years at a rate of 15% followed by a stable growth rate of 4%. The key steps include calculating the expected dividends during the high growth phase, the terminal value of the dividends after the company enters its stable growth phase, discounting these values to present terms, and then summing them up to determine the current share price.
For Babble Inc, if we were to do similar calculations based on the information provided, we would discount the future profits at a given interest rate, here 15%, and then divide the present value by the number of shares to find the price per share. This example demonstrates a real-world scenario of dividend valuation and investing decision-making. However, in the real world, variables like expected profits and the appropriate discount rate involve a certain amount of estimation and uncertainty, emphasizing the unpredictability and complexity of the stock market.