You own 1,500 shares of stock in Avondale Corporation.You will receive a $0.80 per share dividend in one year.In two years,Avondale will pay a liquidating dividend of $35 per share.The required return on Avondale stock is 16 percent.You only want $200 total in dividends in year one and accomplish this by using homemade dividends.What will your total dividend amount be in year two?

Question

Quizplus · Accepted Answer

Dividends received in one year = 1,500 × $0.80 = $1,200Price of stock in one year = $35/1.16 = $30.1724Number of shares purchased = ($1,200 - $200)/$30.1724 = 33.142857 sharesDividend in year two = $35 × (1,500 + 33.142857) = $53,660

You Own 1,500 Shares of Stock in Avondale Corporation