You own 1,000 shares of stock in Avondale Corporation.You will receive an 80-cent per share dividend in one year.In two years,Avondale will pay a liquidating dividend of $40 per share.The required return on Avondale stock is 14 percent.What will your dividend income be this year if you use homemade dividends to create two equal annual dividend payments?

Question

Quizplus · Accepted Answer

P₀ = ($0.80/1.14) + ($40/1.14²) = $31.48$31.48 = (D/1.14) + (D/1.14²); D = $19.117Dividend income = 1,000 × $19.117 = $19,117

You Own 1,000 Shares of Stock in Avondale Corporation