Question

A share of​ Shehryar, Inc. stock is expected to pay a

​$2.50 dividend one year from now. Dividends are then predicted
to grow by 20.00​%/year for two years. Across years​ 4, 5, and​ 6,
divid

Answer 1

To value a share of Babble, Inc. stock, an investor would calculate the present value of the expected dividends prior to the company's disbandment. Initial dividends yield $75,000 per share immediately, but future dividends need to be discounted back at an assumed rate of return to find their present values.

Step-by-step explanation:

The valuation of a share of stock in a company like Babble, Inc. can be determined by calculating the present value of the expected dividends. Since Babble, Inc. is expected to disband in two years, the valuation would only consider the dividends paid in these two years. To find the value an investor might pay for a share of Babble, Inc. stock, we add the present value of dividends expected:

• $15 million divided by 200 shares, which equals $75,000 per share right now.
• $20 million in one year: Divided by 200 shares equals $100,000, discounted back at the required rate of return.
• $25 million in two years: Divided by 200 shares equals $125,000, discounted back at the required rate of return.

Without the required rate of return, we cannot calculate the precise present value for the dividends after the first year, but an investor would pay the sum of the present values of these dividends for a share of stock in the company.