Final answer:
An investor would consider the present value of projected profits expected from Babble, Inc. and divide this by the number of shares to determine the price per share. If the present value of the profits is $51.3 million and there are 200 shares, the price per share would be $256,500.
Step-by-step explanation:
When evaluating what an investor might pay for a share of stock in a company such as Babble, Inc., it's important to consider the present value (PV) of expected future profits. Given that Babble, Inc. plans to disband in two years and has projected profits that will be distributed as dividends, we perform a present value calculation for each year's profits and then sum them to find the total present value of all dividends.
First, we find the present value for each of the expected profits: $15 million now, $20 million one year from now, and $25 million two years from now. Each of these amounts must be discounted back to their present value using an appropriate discount rate, which reflects the time value of money and the expected rate of return.
Once the total PV of all profits is calculated, you divide this amount by the number of shares to determine the share price. For example, if the total PV is $51.3 million and there are 200 shares, the price per share would be $256,500.