THANK YOU! On January 1, 2012, Jessica owns 1.000 shares of Sada Company stock.
ID: 2698359 • Letter: T
Question
THANK YOU!
On January 1, 2012, Jessica owns 1.000 shares of Sada Company stock. Sada will pay a dividend of S64.00 per share on December 31. 2012, followed by a final liquidating dividend of S43.75 per share paid on December 31. 2013. Sada stock has a required return of 25%. Jessica's objective is to end up on December 31, 2012, with an amount of cash from her investment in Sada that equals the amount of cash she will receive from her investment in Sada on December 31,2013. To accomplish her goal, Jessica is willing to buy additional Sada stock or to sell some of her Sada stock on December 31,2012, immediately after the first dividend is paid. If she does this, the total dividend payment she will receive on December 31, 2013 is $53,875. $39,600. $55,000. $61,875.Explanation / Answer
Since the final payment is 43.75 per share and the rate of return 25% the stock will be worth 43.75/(1.25)= $35.00. We have 64,000 from the dividend payment so.
64,000- 35x = (1,000+x)*43.75 where x is the shares purchased.
Solving for x it is 257.14285 shares she should buy (assuming you can buy fractional shares),
If he does she will have 1,257.14285* 43.75= 55,000 at the last dividend payment.
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