Question

Feast Inc. has a stock price of $100 and is about to pay a $5 cash dividend. An investor owns 4,000 shares and prefers a $8 cash dividend. How many shares will the investor have to sell to create a “homemade” dividend?

Question 6 options:

	153 shares
	142 shares
	127 shares
	131 shares

Part 2

Suppose Feast Inc. pays a $6 dividend, in which case the investor would not have sold any shares. Assuming no tax implications, what would the impact on the investor’s wealth be compared to Feast Inc. paying the $3 dividend?

Part 2 options:

	Greater
	Less
	The same
	Not enough information

Answer 1

Part 1:
The extra amount which the Investor requires = (difference in expectation of dividend) X number of shares.
=(8-5)×4000
= $12,000.

Approximate value of the share after dividend payment = $95
(Current market price- distribution in form of dividend)

The number of shares the investor have to sell to create a “homemade” dividend = 12,000/95
=126.32
= 127 shares.

Answer: 127 shares.

Part 2:
Investors wealth = after dividend share price+ amount of current dividend paid.

There will be no effect because if dividend paid is more then share price will decrease and if dividend paid is less then share price increase.
So overall Investors wealth remains same.

Answer: The same.