Question

You own 2,200 shares of stock in Avondale Corporation. You will receive a $1.60 per share dividend in one year. In two years, the company will pay a liquidating dividend of $60 per share. The required return on the stock is 20 percent. Ignoring taxes, what is the current share price of the stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Share price $ If you would rather have equal dividends in each of the next two years, how many shares would you sell in one year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Number of shares $ What would your cash flow be each year for the next two years? Hint: Dividends will be in the form of an annuity. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Cash flow $

Answer 1

Present value = Future value/(1+i)^n

i = interest rate per period

n= number of periods

a)

Current stock price = present value of future cashflows

= 1.6/1.2 + 60/1.2^2

= 1.33 + 41.67

= 43.00

b)

Price after one year = 60/1.2 = 50

let x be the no of shares sold at the stock price after one year

2200 * 1.6 + x*50 = (2200-x) * 60

=>

3520 + 50x = (2200 -x) * 60

=>

110x = 132000 - 3520

=>

x = 128480/110 = 1168 shares

c)

cash flow in year 1 = 2200 * 1.6 + 1168 * 50 = 61920

Cashflow in year 2 = 1032 * 60 = 61920