You own 1,000 shares of stock in Avondale Corporation. You will receive a $0.65

Question

You own 1,000 shares of stock in Avondale Corporation. You will receive a $0.65 per share dividend in one year. In two years, Avondale will pay a liquidating dividend of $30 per share. The required return on Avondale stock is 14 percent. Suppose you want only $210 total in dividends the first year, show how you can accomplish this by creating homemade dividends. Your total dividend amount in year 2 will be $___________.

(Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Minimum stock price = Dividend/Required return = 0.65/0.14 = $4.643

Homemade dividends = $210

Toachieve this homemade dividends you need to short sell 210/4.643 = 45.23 shares

Shares left = 1000 - 45.23 = 954.77 shares

At the end of year one regular dividends = 954.77*0.65 = $620.60

At the end of year one regular dividends = 954.77*0.65 = $620.60

At the end of year two liquidating dividends = 954.77*30 = $28643.1

Total dividends in year two = 620.60 + 28643.1 = $29263.7

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