Question

The common stock of Escapist Films sells for $25 a share and offers the following payoffs next year:

Boom: Dividend $0, Stock Price $18
Normal Economy: Dividend $1, Stock Price $26
Recession: Dividend $3, Stock Price $34
What is the dividend yield on Escapist Films' stock for each scenario?
a. Boom: 0%0%, Normal Economy: 4%4%, Recession: 12%12%
b. Boom: 1%1%, Normal Economy: 4%4%, Recession: 12%12%
c. Boom: 0%0%, Normal Economy: 2%2%, Recession: 4%4%
d. Boom: 1%1%, Normal Economy: 2%2%, Recession: 4%4%

Answer 1

The price an investor would pay for a share of stock in Babble, Inc. would be the present value of future dividends. Without the required rate of return, we can't calculate a specific price, but it would involve discounting the expected dividend payments of $15M, $20M, and $25M for each of the next two years.

Step-by-step explanation:

To determine what an investor would pay for a share of stock in Babble, Inc., one needs to calculate the present value of the future dividends since the company plans to disband in two years. The present value of expected dividends would represent the fair price of the stock today.

Given the profits of $15 million right away, $20 million one year from now, and $25 million two years from now, and the company selling a total of 200 shares, we can calculate the present value of each dividend payment and then sum them to find the total present value per share.

Without additional information on the required rate of return or discount rate, we cannot compute a specific price per share. However, an investor would typically discount each expected dividend payment back to present value terms at their required rate of return and then sum these present values to determine what they would be willing to pay for a share today.