Final answer:
An investor would pay the present value of expected future dividends from Babble, Inc., discounted by the desired rate of return, divided by the number of shares to determine the price per share.
Step-by-step explanation:
To calculate what an investor might pay for a share of stock in Babble, Inc., one can use a valuation method such as the present value of future dividends. We have expected dividends of $15 million, $20 million, and $25 million over a two-year period, which will be distributed to 200 shares. The present value of these dividends can be estimated using a discount rate reflective of the investment's risk. Typically in finance, the appropriate discount rate could be the cost of equity or the expected rate of return.
Let's assume the investor requires a 10% rate of return annually. To find the present value of the dividends:
- Present Value of Dividend in Year 0 = $15 million
- Present Value of Dividend in Year 1 = $20 million / (1 + 0.10)
- Present Value of Dividend in Year 2 = $25 million / (1 + 0.10)^2
Adding all present values together will give the total present value of the future dividends, which would then be divided by the number of shares to find the price per share. Remember, this is a simplified model and real-world considerations may necessitate adjustments.