Clonly Corp's stock pays a dividend of $1.40 and is currently selling for $25, but has not grown in several years. Management feels that 10% growth is possible if the firm discontinues its dividend entirely. Harry owns 6,000 and wants to maintain a constant income stream. How many shares will he have to sell to make up for the first unpaid dividend if Clonly stops paying dividends and starts growing at 10%? Ignore transaction costs and taxes.

Question

Quizplus · Accepted Answer

The correct answer is A.If Clonly stops paying dividends and starts growing at 10%, the stock price will grow by 10% per year. To maintain a constant income stream, Harry will need to sell enough shares to make up for the first unpaid dividend. The first unpaid dividend is $1.40 per share, and Harry owns 6,000 shares. So, he will need to sell 6,000 shares * $1.40 / $25 = 336 shares.

Clonly Corp's Stock Pays a Dividend of $1