Final answer:
An investor would consider the sum of the dividends Babble, Inc. expects to pay out before deciding on how much to pay for a share of stock, adjusting for the time value of money and inherent risks.
Step-by-step explanation:
Valuating a Share of Stock in Babble, Inc.
To determine how much an investor will pay for a share of stock in Babble, Inc., one must consider the expected dividends and the time value of money. Since Babble, Inc. will disband in two years, the investor will be looking at receiving three payments: $15 million immediately, $20 million in one year, and $25 million in two years. Assuming there are 200 shares of stock, the dividend per share would be calculated as follows:
Immediate dividend per share: $15 million / 200 shares = $75,000
One year dividend per share: $20 million / 200 shares = $100,000
Two years dividend per share: $25 million / 200 shares = $125,000
To determine the present value of these future dividends, we would need an appropriate discount rate which reflects the investor's required rate of return. However, since that rate is not provided in the case of Babble, Inc., we cannot calculate an exact share price. Yet, an investor would likely pay a price that is less than the sum of the dividends to account for the time value of money, risks involved, and the lack of future growth prospects after the company is disbanded. When a firm issues stock, investors expect a return, which can be in form of dividends or capital gains.