Al owns 250 shares of M&M Enterprises and earns 12.9 percent on his investment. M&M recently stated that it will pay dividends per share of $.69 this year and $.72 next year. Al does not want any dividend income this year but does want as much dividend income as possible next year. Ignoring taxes, what will Al's total homemade dividend be next year?

Question

Quizplus · Accepted Answer

Al can reinvest this year's dividends to increase next year's dividends. This year, he would receive 250 * $0.69 = $172.50. He can reinvest this amount at 12.9% to get $172.50 * 1.129 = $194.75 next year. Next year's dividends from his original shares will be 250 * $0.72 = $180. Total homemade dividend next year is $180 + $194.75 = $374.75.

Al Owns 250 Shares of M&M Enterprises and Earns 12