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 use the homemade dividend technique to create her desired dividend income next year. To do so, she can choose to either reinvest her dividend now or receive it and invest it herself to earn the desired return of 12 percent.

If she chooses to reinvest her $1.00 dividend this year at 12 percent interest, it will grow to:
$1.00 x (1 + 0.12) = $1.12

Next year, when the company pays a dividend of $0.50 per share, Priscilla will receive a total dividend of:
$1.12 + $0.50 = $1.62

Therefore, Priscilla's homemade dividend per share next year will be $1.62, which is option D.

Priscilla Owns 500 Shares of Delta Stock