Question

ou own 1,800 shares of stock in Armstrong Corporation. You will receive a $1.60 per share dividend in one year. In two years, Armstrong will pay a liquidating dividend of $66 per share. The required return on Armstrong stock is 10%. Suppose you want only $1,200 total in dividends the first year.

What will your homemade dividend be in two years?

Answer 1

The homemade dividend in two years is computed as shown below:

Current stock price is computed as follows:

= Dividend in year 1 / (1 + required rate of return) + Dividend in year 2 / (1 + required rate of return)²

= $ 1.60 / 1.10 + $ 66 / 1.10²

= $ 56

Current stock price = Per share amount of dividend in year 1 / (1 + required rate of return) + Home made dividend in year 2 / (1 + required rate of return)²

$ 56 = $ 0.66667 / 1.10 + Homemade dividend in year 2 / 1.10²

$ 55.39393939 x 1.10² = Homemade dividend in year 2

Homemade dividend in 2 years = $ 67.03 Approximately

Per share amount of $ 0.66667 is computed as follows:

= Amount of dividend / Number of shares

= $ 1,200 / 1,800 shares

= $ 0.666667

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