Creating own dividend policy. Erik owns 2,000,000 shares of Wiseguy Entertainmen

Question

Creating own dividend policy. Erik owns 2,000,000 shares of Wiseguy Entertainment. Wiseguy just declared a cash dividend of $0.05 per share. The stock is currently selling for $5.00. If Erik wants an annual “dividend income” of

$50,000, $100,000, or $250,000

from his stock holdings, what must he do to get these levels of income?

What is his wealth in paper and cash for each level of desired dividend income level? Assume a world of no taxes.

Please provide formulas/work for all parts of the question. Thanks so much in advance!!

Explanation / Answer

E 's present share holding is 2,000,000 shares.

Dividend per share = $0.05 per share.

Dividend = $2,000,000*$0.05 = $100,000.

Wealth in paper = 2,000,000 shares @1 = $2,000,000.

Wealth in Cash = $2,000,000 shars @5 = $10,000,000.

If E wants dividend income of $50,000, he has to sell half of the shares he held @5 per share. now, the revised share holding is 1,000,000 shares.

Wealth in paper = 1,000,000 shares @1 = $1,000,000.

Wealth in Cash = $1,000,000 shars @5 = $5,000,000.

If E wants dividend income of $250,000, he has to buy 3,000,000 shares @5 per share. Now, the revised shareholding is 5,000,000 shares.

Wealth in paper = 5,000,000 shares @1 = $5,000,000.

Wealth in Cash = $5,000,000 shars @5 = $25,000,000.

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