Tom Parsley has 15,000 shares of Alistair Inc. stock that sells for $12 a share and pays an annual dividend of $0.75 per share. The corporation plans to discontinue its cash dividend and begin reinvesting the money in a new idea that is expected to bring about growth of 7% a year. Assuming no costs are involved in selling securities, how many shares must Tom sell next year to maintain his income and his position in the firm?

Question

Quizplus · Accepted Answer

Tom needs to sell enough shares to replace the lost dividend income. The dividend income is 15,000 shares * $0.75 = $11,250. With a 7% growth, the stock price is expected to be $12 * 1.07 = $12.84. To maintain his income, Tom needs to sell $11,250 / $12.84 ≈ 876 shares.

Tom Parsley Has 15,000 Shares of Alistair Inc