Final answer:
Xona, Inc. is paying a one-time special dividend of $12.80 per share after selling its plastics division. Investors pay for stocks with the expectation of earning a return through dividends or capital gains. The price an investor would pay for a share of Babble, Inc. is based on the present value of all future dividends.
Step-by-step explanation:
The one-time dividend of $12.80 per share that Xona, Inc. is paying as a result of selling its plastics division to New Products Co. is termed as a special dividend. Special dividends are non-recurring and typically larger than the company's standard dividends distributed from typical earnings.
Using the example of Babble, Inc., if this company expects profits of $15 million, $20 million, and $25 million over the next three years, respectively, these profits will also be paid out as dividends to shareholders as they are earned. To determine what an investor would pay for a share of stock in this scenario, one must calculate the present value of these future dividends. If the company is selling 200 shares, assuming no growth rate and a required rate of return, the value per share would simply be the sum of the profits divided by the number of shares.
Companies like Coca-Cola and electric companies offer dividends which represent a percent of the profits earned. When someone holds stocks that pay dividends, the more shares they own, the higher their return from dividends will be. Investors expect to receive a return on their investment, which can come in the form of dividends as well as capital gains which are the increase in the stock value between the time it is bought and when it is sold.