P.S. PLEASE DONT COPY answer of others, they were incorrect. You own 1.100 share

Question

P.S. PLEASE DONT COPY answer of others, they were incorrect.

You own 1.100 shares of stock in Avondale Corporation. You will receive a $2.00 per share dividend in one year. In two years, Avondale will pay a liquidating dividend of $75 per share. The required return on Avondale stock is 20 percent. Ignoring taxes, what is the current share price of your stock? (Do not round intermediate calculations. Round your answer to 2 decimal places, (e.g., 32.16)) Share price If you would rather have equal dividends in each of the next two years, how many shares would you sell in one year? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) Number of shares What would your cash flow be for each year for the next two years?

Explanation / Answer

Part 2)

To determine the number of shares to be sold in Year 1, we first need to determine the amount of annual dividend. The amount of annual dividend can be calculated with the use of PMT function/formula of EXCEL/Financial calculator. The function/formula for PMT is PMT(Rate,Nper,-PV,FV) where Rate = Required Return, Nper = Period, -PV = Current Selling Price and FV = Future Value (if any)

We also need to determine the share price at the end of Year 1 with the use of following formula:

Price at Time 1 = Liquidating Dividend/(1+Required Return)

____________

Here, Rate = 20%, Nper = 2, PV = $53.75 (as calculated in Part 1) and FV = 0

Using these values in the above function/formula for dividend, we get,

Annual Dividend = PMT(20%,2,-53.75,0) = $35.18

_______

Price at Time 1 = 75/(1+20%) = $62.50

_______

Since, 1,100 shares are owned, the total expected cash flow in year 1 would be 1,100*35.18 = $38,700 but dividends that would actually be recieved would be 1,100*2 = $2,200. Therefore, you will have to sell additional shares in order to arrive at the cash flow of $38,700. The number of shares required to be sold in 1 year has been calculated below:

Number of Shares to be Sold = (Expected Cash Flow - Actual Cash Flow)/Share Price at Time 1 = (38,700 - 2,200)/62.50 = 584 shares

____________

Part 3)

For year 2, the cash flow would be determined in respect of shares still owned by you. The formula for calculating the cash flow would be:

Cash Flow (Year 2) = Liquidating Dividend*(Initial Number of Shares - Shares Sold)

____________

Using the information provided in the question and values calculated above, we get,

Cash Flow (Year 2) = 75*(1,100 - 584) = $38,700

Therefore, cash flow in both the years would be $38,700.

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