House of Haddock has 5,070 shares outstanding and the stock price is $147. The c
ID: 2673658 • Letter: H
Question
House of Haddock has 5,070 shares outstanding and the stock price is $147. The company is expected to pay a dividend of $27 per share next year and thereafter the dividend is expected to grow indefinitely by 4% a year. The President, George Mullet, now makes a surprise announcement: He says that the company will henceforth distribute half the cash in the form of dividends and the remainder will be used to repurchase stock.
What is the expected stream dividend per share in year 1 and year 2 for an investor who plans to retain his shares rather than sell them back to the company? (Round your answers to 2 decimal places. Omit the "$" sign in your response.)
Explanation / Answer
Dividends ll grow at 4% a year For year 1 dividend = ( 1+4/100 ) x 27 = $28.08 However investor would be getting half of it. Therefore dividend received in year 1 = 28.08/2 = $14.04 For year 2 dividend = ( 1+4/100) x (1+4/100) x 27 = $29.20 However investor would be getting half of it. Therefore dividend received in year 2 = 29.20/2 = $14.6
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