Final answer:
The price a shareholder might pay for a share of stock in Should I, Inc. can be calculated using the dividend discount model, which considers expected future dividends and a required rate of return. By calculating and summing the present values of future dividends and dividing by the number of shares, one can determine the share price.
Step-by-step explanation:
To determine the price a shareholder would be willing to pay for a share of Should I, Inc., considering the dividend growth projection, one would use the dividend discount model. This model takes into account the dividends expected to be paid out in the future and discounts them back to their present value at the required rate of return. In the case of Should I, Inc., the calculations involve accounting for the initial $1.25 per share dividend which is expected to grow at 20 percent the next year, and then decline linearly over the following years until it reaches a 5 percent perpetual growth rate.
Similarly, in the hypothetical scenario involving Babble, Inc., an investor would calculate the present value (PV) of the dividends (which in this case equate to the company's profit as it will be disbanded) expected over the next two years. For instance, Babble, Inc. expects profits of $15 million immediately, $20 million in one year, and $25 million in two years. Assuming an investor requires a 15 percent return, and all 200 shares receive an equal share of profits as dividends, the present value of these dividends would be calculated for each year and then added up. The total present value would then be divided by the number of shares to determine the price per share.