Priscilla owns 500 shares of Delta stock. The company recently issued a statement that it will pay a $1.00 per share dividend this year and a $.50 per share dividend next year. Priscilla does not want any dividend this year but does want as much dividend income as possible next year. Her required return on this stock is 12 percent. Ignoring taxes, what will Priscilla's homemade dividend per share be next year?

Question

Quizplus · Accepted Answer

Priscilla can create a homemade dividend by reinvesting the dividend she receives this year into additional shares of Delta stock. The $1.00 per share dividend this year, if not taken as cash, can be considered as reinvested at her required return rate of 12 percent. Therefore, next year, that $1.00 would grow to $1.00 * (1 + 0.12) = $1.12. Adding this to the original $.50 per share dividend next year, the total homemade dividend per share next year would be $1.12 + $.50 = $1.62.

Priscilla Owns 500 Shares of Delta Stock