Final answer:
The price an investor might pay for a share of Babble, Inc.'s stock is determined by calculating the present value of all expected dividends, considering the required rate of return, and dividing by the total number of shares.
Step-by-step explanation:
To calculate the current market price of Babble, Inc.'s stock, we need to determine the present value of all expected future dividends. Given that Babble, Inc. will be disbanded in two years, we have a finite number of dividends to consider: $15 million immediately, $20 million in one year, and $25 million in two years. The present value of these dividends, divided by the number of shares available, will give us the price per share that an investor might be willing to pay.
Assuming a required rate of return (which could be seen as the discount rate in this case) that investors would normally expect for an investment of this nature, we would discount each of the dividends to their present values. Once we have the present values, we sum them up and divide by the total number of shares to get the price per share.
For example, if the required rate of return is 10%, the present value of the dividends can be calculated using the formula PV = D / (1 + r)^t, where D is the dividend, r is the required rate of return, and t is the time in years until the dividend is received. The investor would sum the present values to determine the total expected value of the investment and then divide by the number of shares to find the per share value.