Question

You own 2,200 shares of stock in Avondale Corporation. You will receive a dividend of $1.60 per share in one year. In two years, the company will pay a liquidating dividend of $60 per share. The required return on the company's stock is 20 percent. a. 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.) b. 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 and round your answer to the nearest whole number, e.g., 32.) c. What would your cash flow be for each year for the next two years if you create equal homemade dividends? Hint: Dividends will be in the form of an annuity. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Share price b. Number of shares c. Cash flow

please show answers with calculations clearly, thanks!!

Answer 1

a]	Current share price = 1.60/1.2+60/1.2^2 =	$               43.00
b]	Total dividend receivable in 1 year = 2200*1.6 =	$               3,520
	Yearly cash flow required [form c below]	$             61,920
	Balance to be received from sale of shares	$             58,400
	Price per share at end of year 1 = 60/1.2 =	$               50.00
	Number of shares to be sold = 58400/50 =	1168	Shares
c]	Current price of 2200 shares = 2200*43 =	$             94,600
	Yearly cash flow = 94600*0.20*1.2^2/(1.2^2-1) =	$             61,920