Dividend policy and firm value: You purchased 2,000 shares of NoDiv Technologies several years ago at $50 per share. The company does not pay a regular cash dividend. You want to "manufacture" your own dividend by selling a little bit of stock each quarter. The company's stock is currently trading at $75. If capital gains are taxed at 15 percent, how many shares would you have to sell to receive $3,420 in cash?

Question

Quizplus · Accepted Answer

To calculate the number of shares that need to be sold to generate $3,420 in cash, we need to first calculate the gain per share.

Since the shares were bought at $50 and are now selling at $75, the gain per share is $75 - $50 = $25.

Now, we need to calculate the amount of gain that needs to be realized to generate $3,420 in cash.

To do this, we use the formula:

Amount of gain = Amount of cash needed / (1 - Capital gains tax rate)

Plugging in the numbers, we get:

Amount of gain = $3,420 / (1 - 0.15) = $4,023.53

Now, we divide the amount of gain by the gain per share:

Number of shares = Amount of gain / Gain per share

Number of shares = $4,023.53 / $25 = 160.94

Since we can't sell a fraction of a share, we round up to the nearest whole number to get:

Number of shares = 161

However, we want to know how many shares need to be sold each quarter, which is 161 / 4 = 40.25.

Again, we round up to the nearest whole number to get the final answer:

Number of shares to be sold each quarter = 41

Therefore, the correct answer is C) 48 shares.

Dividend Policy and Firm Value: You Purchased 2,000 Shares of NoDiv