$110 in the future. We will first shows how to apply the idea of present discounted value to a stock and then we

will show how to apply it to a bond.

Applying Present Discounted Value to a Stock

Consider the case of Babble, Inc., a company that offers speaking lessons. For the sake of simplicity, say that

the founder of Babble is 63 years old and plans to retire in two years, at which point the company will be

disbanded. The company is selling 200 shares of stock and profits are expected to be $15 million right away, in

the present, $20 million one year from now, and $25 million two years from now. All profits will be paid out as

dividends to shareholders as they occur. Given this information, what will an investor pay for a share of stock

in this company?

A financial investor, thinking about what future payments are worth in the present, will need to choose an

interest rate. This interest rate will reflect the rate of return on other available financial investment
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