Your sister owns 500 shares of Omega stock.It is January 1,2010,the company recently issued a statement that it will pay a $1.60 per share dividend on December 31,2010 and a $.25 per share dividend on December 31,2011.She 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 10%.Ignoring taxes,what will your sister's homemade dividend per share be in 2011?

Question

Quizplus · Accepted Answer

To maximize her dividend income in 2011, your sister can reinvest the $1.60 dividend received in 2010 at her required return of 10%. This means she will have $1.60 * 1.10 = $1.76 per share in 2011. Adding the $0.25 dividend in 2011, her homemade dividend per share will be $1.76 + $0.25 = $2.01.

Your Sister Owns 500 Shares of Omega Stock