Question

You own 1,000 shares of stock in Avondale Corporation. You will receive $3.115 per share cash dividend in one year. In two years, the company will pay a liquidating dividend of $57 per share. The required return on the company’s stock is 15 percent. What is the current price of your stock? (Ignore taxes). If you would rather have equal dividends in each of the next two years, show how you can accomplish this by creating homemade dividends (Hint: dividends will be in a form of annuity).

Please show work!

Answer 1

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ALL WORK WITH SIMPLE CALCULATION. NO EXCEL FUNCTION IS USED. JUST SIMPLE MATHEMATICAL CALCULATIONS

PE EPS, STOCK DIVIDEND-Microsoft Excel File Home Insert Page Layout Formulas Data Review View Add-Ins - Cut AutoSum A A Wrap Text Calibri 11 General Fill Copy Conditional Format Formatting A- Merge & Center Insert Delete Format Paste Cell Sort & Find & BIU 2 Clear Format Painter ble Styles er Select Clipboard Font Alignment Number Shules Cells Editing PT57 PT PZ QA PS PU PV PW PX PY QB QC QD 57 58 PO = PRESENT VALUE OF DIVIDENDS D1/(1+ke)+D2/(1+ke)^2 D1- 3.115, D2 57, ke-15 % 59 PO 3.115/(1+0.15)57/(1+0.15)^2 60 PO 45.81 61 PO= 62 63 NOW WE NEED EQUAL DIVIDEND FOR BOTH THE YEARS SO D/(1+0.15) D/(1+0.15)^2 D(0.869565217) + D(0.756143667) 64 45.81 = 65 45.81 D(1.625708885) 66 45.81 28.18 67 D= 68 69 NOW PRICE OF STOCK AFTER A YEAR = P1 = D2/(1+ke) 57/(1+0.15) 70 P1- 49.57 71 72 NOW YOU HAVE 1000 SHARES 73 SO YOU WANT EACH YEAR L000 X .18 28177.79 74 BUT YOU WILL GET ONLY 1000 X 3.115 = 3115 SO SHORTFALL IN CASH FLOW = 75 25062.79 marginal tax PB ROPI APv ROSSprice quote EVA MVA LEVERAGED BUYSWAPdistress BRIGHAN CAP GAIN Sheet1 Shee 130% ABNORMAL deberk MARGIN MONEY Re erences: AL125 W 01:48 | 4 m 4* ENG 28-06-2019

PE EPS, STOCK DIVIDEND-Microsoft Excel File Home Insert Page Layout Formulas Data Review View Add-Ins - Cut Ea Copy AutoSum A A Wrap Text Calibri 11 General Fill Conditional Format Formatting A- Merge & Center Insert Delete Format Paste BIU Cell Sort & Find & 2 Clear Format Painter ble Styles er Select Clipboard Font Alignment Number Shules Cells Editing PS57 PZ QA Po PT PU PV PW PX PY QB QC QD 57 58 PO = PRESENT VALUE OF DIVIDENDS D1/(1+ke)+D2/(1+ke)^2 D1- 3.115, D2 57, ke-15 % 59 PO 3.115/(1+0.15)57/(1+0.15)^2 60 PO 45.81 61 PO= 62 63 NOW WE NEED EQUAL DIVIDEND FOR BOTH THE YEARS SO D/(1+0.15) D/(1+0.15)^2 D(0.869565217) + D(0.756143667) 64 45.81 65 45.81 D(1.625708885) 66 45.81 28.18 67 D= 68 69 NOW PRICE OF STOCK AFTER A YEAR = P1 = D2/(1+ke) 57/(1+0.15) 70 P1 - 49.57 71 72 NOW YOU HAVE 1100 SHARES 73 SO YOU WANT EACH YEAR L000 X .18 28177.79 74 BUT YOU WILL GET ONLY 1000 X 3.115 = 3115 SO SHORTFALL IN CASH FLOW = 75 25062.79 marginal tax PB ROPI APv ROSSprice quote EVA MVA LEVERAGED BUYSWAPdistress BRIGHAN CAP GAIN Sheet1 Shee 130% ABNORMAL deberk MARGIN MONEY Re erences: AL125 W 01:48 ENG 28-06-2019