Final answer:
Investors calculate the value of a share by finding the present value of future dividends and dividing by the number of shares. For Babble, Inc., this involves discounting the determined future profits for immediate, one year, and two years' dividends, then totaling these and dividing by 200 shares to find the share price.
Step-by-step explanation:
Understanding Financial Valuation of Shares
When considering the price an investor would pay for a share of Babble, Inc., a company selling 200 shares of stock with a clear profit distribution schedule, we need to calculate the present value of future dividends. The investor's willingness to pay depends on the time value of money, as future profits are not worth as much as present profits due to potential alternative investments and inflation.
To find the value per share, we calculate the total present value of all expected future dividends and then divide by the number of shares. The present value of dividends can be found using the formula PV = FV / (1 + r)^n, where PV is the present value, FV is the future value of the dividend, r is the discount rate reflective of the cost of capital or required rate of return, and n represents the number of years until the dividend is received.
If the profits of $15 million, $20 million, and $25 million are paid out immediately, in one year, and in two years respectively, and assuming a reasonable discount rate, we calculate the present values for each dividend payout and sum them before dividing by the total number of shares. This will yield the price an investor is likely to pay for a share in Babble, Inc.