You own 1,100 shares of stock in Avondale Corporation. You will receive a $1.80

Question

You own 1,100 shares of stock in Avondale Corporation. You will receive a $1.80 per share dividend in one year. In two years, Avondale will pay a liquidating dividend of $45 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? Hint: Dividends will be in the form of an annuity. (Do not round intermediate calculations.)

You own 1,100 shares of stock in Avondale Corporation. You will receive a $1.80 per share dividend in one year. In two years, Avondale will pay a liquidating dividend of $45 per share. The required return on Avondale stock is 20 percent.

Explanation / Answer

a)Share Price will be Cash inFlow/per share PVF @ 20% Present Value Year 1 1.8              0.833                    1.50 Year 2 45              0.694                 31.25 Share price                 32.75 b) no of shares to be sold No of Shares = 1100 Dividend in year 1 = 1100* 1.8 = $1980 No of shares required to earn the dividend of $ 1800 in year 2 = $1980/45 = 44 shares i.e No of shares to be sold = 1100-44 = 1056 3) Cash flow Per year Dividend per share No of Shares Total Dividend Year 1 1.8 1100 1980 Year 2 45 1100 49500

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