You own 1,100 shares of stock in Avondale Corporation. You will receive a $2.00
ID: 2810133 • Letter: Y
Question
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, the company will pay a liquidating dividend of $75 per share. The required return on the company's stock is 20 percent.
Ignoring taxes, what is the current share price of your stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
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, the company will pay a liquidating dividend of $75 per share. The required return on the company's stock is 20 percent.
Explanation / Answer
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 = 2/1.20 + 75/1.20^2
Share price = $ 53.75
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))
Share Price in Year 1 = 75/1.20 = $ 62.50
Current Investment = 53.75*1100 = $ 59125
Equal Total Dividend or Cash Flow = pmt (rate,nper,pv,fv)
Equal Total Dividend or Cash Flow = PMT(20%,2,-59125,0)
Equal Total Dividend or Cash Flow = 38700
No of Share Sold = (38700 - 2*1100)/Share Price in Year 1
No of Share Sold = 36500/62.50
No of Share Sold = 584
Answer
Number of shares 584
What would your cash flow be for each year for the next two years? Hint:Dividends will be in the form of an annuity. (Do not round intermediate calculations.)
Current Investment = 53.75*1100 = $ 59125
Equal Total Dividend or Cash Flow = pmt (rate,nper,pv,fv)
Equal Total Dividend or Cash Flow = PMT(20%,2,-59125,0)
Equal Total Dividend or Cash Flow = 38700
Answer
Cash flow $ 38700
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