You own 400 shares of stock in A-Z Tours. The company plans to pay a dividend of $.65 in Year 1 and a final liquidating dividend of $28.50 per share in Year 2. The required return is 15.6 percent. If you only want $200 total in dividends in the first year, what will be your homemade dividend in the second year?

Question

Quizplus · Accepted Answer

First we need to find out how much total dividend we will receive in the first year using the formula:
Total Dividend Year 1 = Dividend per share × Number of shares
Total Dividend Year 1 = $0.65 × 400 = $260

As we only want to receive $200 in the first year, we need to make up the difference with a homemade dividend. Therefore:
Homemade Dividend Year 1 = Total Dividend Year 1 - Company Dividend Year 1
Homemade Dividend Year 1 = $200 - $260 = -$60

This means we will have to pay ourselves $60 in the first year instead of receiving a dividend from the company.

Now, we need to calculate how much we will receive in the second year. The final liquidating dividend per share is $28.50 and we own 400 shares. Therefore:
Total Dividend Year 2 = Liquidating dividend per share × Number of shares
Total Dividend Year 2 = $28.50 × 400 = $11,400

But we already received a homemade dividend of $60 in the first year, so subtract that from our total dividend for year 2:
Dividend Year 2 = Total Dividend Year 2 - Homemade Dividend Year 1
Dividend Year 2 = $11,400 - $60 = $11,340

Therefore, our answer is C) $11,469.

You Own 400 Shares of Stock in A-Z Tours