2. Facebook has grown at an average of 5% per year over its long history. Its st

Question

2. Facebook has grown at an average of 5% per year over its long history. Its stock price is currently $50 and its most recent dividend was $3. Facebook just announced that it plans to discontinue dividends for several years to take advantage of some growth opportunities. Analysts expect the stock price to increase by 10% per year for at least the next two years because of this growth. Professor Loo owns 5.000 shares of Facebook and has counted on their dividend payments to supplement his retirement income. Now it appears that he will have to start selling off his Facebook stock to replace this lost income. How many shares of stock will Professor Loo have to sell in each of the next two years to replace his lost dividend income? Ignore taxes and transaction costs.

Explanation / Answer

Answer:

Year 1 Dividend = 0

Stock Price Year 1 = Current price * 110% = $50*110% = $55

Lost dividend income = 5000 Shares *($3*105%) = $15750

Hence Number of shares to be sold in year 1 = 15750 / $55 =286 Shares

Year 2 Dividend = 0

Stock Price Year 2 = Year 1 price * 110% = $55*110% = $60.50

Lost dividend income = 5000 Shares *($3*105%*105%) = $16537.50

Hence Number of shares to be sold in year 1 = 16537.50 / $60.50 =273 Shares

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.