Question

You own 1,800 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 $66 per share. The required return on the company's stock is 14 percent. Suppose you want only $600 total in dividends the first year. What will your homemade dividend be in two years

Answer 1

To calculate the homemade dividend in two years, subtract the desired first-year dividend from the total possible first-year dividend and add this to the liquidating dividend in the second year. The calculated homemade dividend in the second year for the student, given they want only $600 in Dividends the first year, would be $121,080.

Step-by-step explanation:

The question pertains to the calculation of a homemade dividend in a scenario where a shareholder decides to receive a portion of their dividend income in the first year and defer the rest to the second year when a liquidating dividend will be paid. As the student owns 1,800 shares and seeks only $600 in dividends the first year instead of the full $1.60 per share, which would amount to $2,880, they are opting to take a smaller amount in the first year. To determine the homemade dividend in two years, we need to calculate the difference between the total dividends that could be received in the first year and the amount the student desires ($2,880 - $600 = $2,280). This amount is then to be added to the liquidating dividend that will be received in the second year ($66 per share times 1,800 shares).

Here's a breakdown of the calculation:

• Total first-year dividends if fully received: $1.60 × 1,800 shares = $2,880
• Desired first-year dividends: $600
• Deferred amount: $2,280
• Liquidating dividend in two years: $66 x 1,800 shares = $118,800
• Homemade dividend in two years: $118,800 + $2,280 = $121,080

The homemade dividend in two years would be $121,080, taking into account the deferral of a portion of the first year's dividends to the second year.

Answer 2

$121,399.08

Step-by-step explanation:

Given:

•Shares of stock= 1800

• yearly per share dividend = $1.60

• Liquidating dividend per share = $66

• Required return on stock = 14℅

•Dividend required by me = $600

Let's solve for the following:

•Dividend received in one year = 1800 × 1.60 = $2,880

•For price of stock in one year, we have:

$66/1.14 = $57.895

•We now need to find the number of shares purchased,

($2880-$600)/57.896 =

39.38shares

Therefore, dividend in two years will be:

$66 (1800+39.38) = $121,399.08