You own 1,100 shares of stock in Avondale Corporation. You will receive a $2.00

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, Avondale will pay a liquidating dividend of $75 per share. The required return on Avondale stock is 20 percent. 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)) 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)) What would your cash flow be for each year for the next two years?

Explanation / Answer

a)

Current Share Price = 2/1.20 + 75/1.20^2

Current Share Price = $ 53.75

b & C)

Stock Price in next year = 75/1.20 = $ 62.50

Present value = 1100*53.75 = 59125

Equal Cash Flow = Present Value/PVA(20%,2)

Equal Cash Flow = 59125/1.527778

Equal Cash Flow = $ 38700

No of Share Sold = (38700 - 1100*2)/62.50

No of Share Sold = 584 Share

Answer

No of Share Sold = 584 Share

Cash Flow = $ 38700

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