Question

You own 1,900 shares of stock in Avondale Corporation. You will receive a dividend of $2.00 per share in one year. In two years, Avondale will pay a liquidating dividend of $57 per share. The required return on Avondale stock is 20 percent.

  

Ignoring taxes, what is the current share price of your stock? (Do not round intermediate calculations. 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. Round your answer to 2 decimal places, e.g., 32.16.)

  

Number of shares

What would your cash flow be for each year for the next two years if you create equal homemade dividends? Hint: Dividends will be in the form of an annuity. (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

Cash flow

$

Answer 1

Total Number of stock owns = 1,900

Dividend per share in first year = $2.00

Total value of dividend receives in first year = 1,900 × $2

= $3,800

Since you need just $1,900 dividend in first year so remaining sum you have reinvested in company as it were.

So total value of reinvestment = $3,800 - $1,900

= $1,900

Required rate of return = 20%

Value of reinvestment in year 2 = $1,900 × (1 + 20%)

= $2,280

Liquidating dividend got in year 2 = $57

Since you have gotten just $1,900 in year 1 and reinvest $1,900 in company.

So total homemade dividend receives in year 2 = $57 + ($2,280/1,900)

= $57 + $1.20

= $58.20

Along these lines, total homemade dividend receives in year 2 is $58.20 per share.