Question

You own 1,100 shares of stock in Avondale Corporation. You will receive a dividend of $2.60 per share in one year. In two years, the company will pay a liquidating dividend of $75 per share. The required return on the company's stock is 20 percent. Suppose you want only $2,000 total in dividends the first year. What will your homemade dividend be in two years? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Answer 1

From the given details about Avondale corporation,

first calculating current stock price per share

P0 = D1/(1+r) + D2/(1+r)^2 = 2.6/1.2 + 75/1.2^2 = $54.25

required dividend in year 2 = $2000

Actual dividend in year 2 = $2.6*1100 = $2860

So, dividend reinvested = $2860-2000 = $860

So, value of reinvested dividend at year 2 = 860*1.2 = $1032

Liquidating dividend in year 2 = 75*1100 = $82500

So, total dividend in year 2 is 82500 + 1032 = $83532

So, homemade dividend in year 2 be $83532