Final answer:
The board of directors' decision to pay a cash dividend means distributing company profits to shareholders. To value a stock, one must calculate the present value of all future dividends and then determine the price per share by dividing by the number of shares. For Babble, Inc., one would divide the total PDV of profits by the number of shares to find the price per share, here shown as $256,500.
Step-by-step explanation:
Understanding Dividends and Stock Valuation When a company's board of directors vote to cash dividend of $1.55 per share of common stock, it means they are distributing a portion of the company's earnings to shareholders. Dividends are paid to shareholders based on the number of shares they own. For instance, if a shareholder owns 100 shares, they would receive a total dividend payment of $155 (100 shares * $1.55 per share). In the context of Babble, Inc., a company expected to divest in two years, an investor would consider the present value (PV) of the dividends they are expected to receive when determining what they would pay for a share of stock. Given the profits expected at different future times - $15 million immediately, $20 million after one year, and $25 million after two years - the present values of these amounts need to be calculated considering a discount rate, in this case, 15%. Once the present values of these expected profits are calculated, they can be summed up to determine the total present value of profits which are then divided by the number of shares to find the price per share. Using the provided example, if the total present value (PDV) of profits was $51.3 million, and there were 200 shares, the price per share would be $256,500 calculated by dividing $51.3 million by 200. This represents how much an investor would be willing to pay for a share of Babble, Inc., assuming a 15% interest rate and immediate payment of dividends.