You own 1,000 shares of stock in Avondale Corporation. You will receive an 80-cent per share dividend in one year. In two years, Avondale will pay a liquidating dividend of $40 per share. The required return on Avondale stock is 14 percent. What will your dividend income be this year if you use homemade dividends to create two equal annual dividend payments?
P0 = ($0.80/1.14) + ($40/1.142) = $31.48
$31.48 = (D/1.14) + (D/1.142); D = $19.117 Dividend income = 1,000 × $19.117 = $19,117 |
98.
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You own 1,500 shares of stock in Avondale Corporation. You will receive a $0.80 per share dividend in one year. In two years, Avondale will pay a liquidating dividend of $35 per share. The required return on Avondale stock is 16 percent. You only want $200 total in dividends in year one and accomplish this by using homemade dividends. What will your total dividend amount be in year two?
Dividends received in one year = 1,500 × $0.80 = $1,200
Price of stock in one year = $35/1.16 = $30.1724 Number of shares purchased = ($1,200 - $200)/$30.1724 = 33.142857 shares Dividend in year two = $35 × (1,500 + 33.142857) = $53,660 |
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Built Rite Corp. is evaluating an extra dividend versus a share repurchase. In either case, $5,500 would be spent. Current earnings are $0.80 per share, and the stock currently sells for $33 per share. There are 250 shares outstanding. Ignore taxes and other imperfections. You own one share of stock in this company. If the company issues the dividend, your total investment will be worth ____ as compared to ____ if the company opts for a share repurchase.
Dividend per share = $5,500/250 = $22
Ex-dividend stock price = $33 - $22 = $11 Shareholder value with dividend option = $22 + $11 = $33 Shares repurchased = $5,500/$33 = 166.6667 Shareholder value with repurchase = $33 Shareholder value if shares held = $33 |
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