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A person has much of his savings invested in 15,000 shares of Grass Roots common stock....

A person has much of his savings invested in 15,000 shares of Grass Roots common stock. The stock is currently selling for $12 per share and has been paying a dividend of $.75 per share. Grass Roots has discontinued its dividend but begins to grow at 7% a year. Assuming no transaction costs.

Q. How can this person maintain his income and his position in the firm at the end of the year?

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Answer #1

Answer Q) As the firm discontinued its dividend but growth in its share price by 7% in  market . Such situation creates a opportunity to sell some shares at higher price to maintain income.

Calculation : Income is equal to dividend yield i.e $ 0.75 / $12= 6.25% per share  

Total income to investor = number of shares * dividend per share = 15000 * 0.75 = $ 11,250.

New price of share = $ 12 * (1+7%) = $ 12.84

No of share should be sold to maintain the same income level = $11,250/$12.84 = 876.17 shares = 877 shares

Remaining share = 15000 -877 = 14123 .

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