Question

You own 1,000 shares of stock in Avondale Corporation. You will receive a dividend of $1.04 per share in one year. In two years, Avondale will pay a liquidating dividend of $37.50 per share. The required return on Avondale stock is 15.8 percent. What will your dividend income be this year if you use homemade dividends to create two equal annual dividend payments? a. $19,270 b. $16,712 c. $18,667 d. $17,935 e. $20,400

Answer 1

Dividend = $17,935

Step-by-step explanation:

We need to calculate the current share price

Current share price = ({Dividend year 1} ÷ {1 + required return}) + ({Dividend year 2} ÷ {1 + required return}^2)

Current share price= ({1.04} ÷ {1 + 0.158}) + ({37.5} ÷ {1 + 0.158}^2)

Current share price= 0.898 + 27.96

Current share price= $28.86

To calculate income for 2 years

Share price is $28.86

Return is 15.8%

Current share price = ({Dividend year 1} ÷ {1 + required return}) + ({Dividend year 2} ÷ {1 + required return}^2)

28.86 = ({Dividend year 1} ÷ {1 + 0.158}) + ({Dividend Year 2} ÷ {1 + 0.158}^2})

28.86 * 1.158 * 1.341 = (Dividend * 1.158) + (Dividend * 1.341)

44.82 = 2.499 * (dividend)

Dividend = $17.935

So for 1,000 shares

Dividend = 1,000 * 17.935 = $17,935