Final answer:
The value of a share of stock in Babble, Inc. is calculated by discounting expected dividends to present value using a 15% interest rate. The total present value of profits is $51.3 million, and divided by the 200 shares, the price per share is approximately $256,500.
Step-by-step explanation:
When considering the value of a share of stock in a company like Babble, Inc., it's important to account for the rate of return an investor expects, which can come from dividends or capital gains. The value of a share is based on the present value (PV) of expected dividends, discounted back at the appropriate interest rate, which reflects risk and the time value of money. With the information given that Babble, Inc. expects profits of $15 million, $20 million, and $25 million over the next two years and all profits are paid out as dividends to shareholders, we can calculate the present value of these dividends.
Given a 15% interest rate, the present value (PV) of the expected profits needs to be discounted for each time period. After performing these calculations, the PV totals $51.3 million. Dividing this number by the 200 shares results in approximately $256,500 per share.