Question

The stock of Business Adventures sells for $45 a share. Its likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows:

Answer 1

An investor will pay for a share of stock based on the expected future cash flows that the stock will generate. The price of a stock is calculated by discounting the future cash flows and is determined through supply and demand in the stock market.

Step-by-step explanation:

An investor will pay for a share of stock based on the expected future cash flows that the stock will generate. In the case of Babble, Inc., the company is expected to generate profits of $15 million, $20 million, and $25 million in the present, one year from now, and two years from now, respectively. These profits will be paid out as dividends to shareholders.

To determine the value of a share of stock, we need to consider the time value of money. The present value of future cash flows is calculated by discounting them at an appropriate rate. Depending on the risk associated with the investment, an investor may use a discount rate that reflects their required rate of return.

Once the present value of the future cash flows is calculated, the investor will pay a price that reflects the value of these cash flows. This price is determined through the interaction of supply and demand in the stock market.