Priscilla owns 500 shares of Deltona stock.It is January 1,2018,and the company recently issued a statement that it will pay a $1 per share dividend on December 31,2018,a $2.50 per share dividend on December 31,2019,and then cease all dividend payments.Priscilla does not want any dividend income this year but does want as much dividend income as possible next year.Priscilla can earn 8 percent on her investments.Ignoring taxes,what will Priscilla's homemade dividend per share be in 2019?

Question

Quizplus · Accepted Answer

To maximize dividend income in 2019, Priscilla should not reinvest the 2018 dividend and invest it separately to earn interest. The value of the 500 shares after the 2018 dividend payment is $500, as follows:
500 shares x $1 per share = $500.
Priscilla can invest that $500 at an 8% interest rate to earn interest over the next year. Therefore, after one year, Priscilla's investment will be worth $500 x 1.08 = $540. Priscilla will receive a $2.5 dividend per share in 2019, which will be worth $1,250.
To calculate the homemade dividend, add the interest earned to the 2019 dividend and divide by the number of shares. The dividend per share will be:
($2.5 + $40)/500 = $0.085 + $2.50 = $3.58. Therefore, the answer is D, $3.58.

Priscilla Owns 500 Shares of Deltona Stock