Question

ork Chapter 17 G Saved You own 2,200 shares of stock in Avondale Corporation. You will receive a $1.80 per share dividend in one year. In two years, the company will pay a liquidating dividend of $45 per share. The required return on the company's stock is 20 percent. 3 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 2 decimal places, e.g., 32.16.) c. 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.) a. Share price Number of shares b. C. Cash flow

Answer 1

Share price is equal to the present value of all future dividends

= 1.80/1.2 + 45/(1.2)^2

= $32.75 per share

b.Share price after one year = 45/1.2 = $37.5

Let Number of shares sold be x

1.8*2200 + 37.5x = 45*(2200-x)

3960 + 37.5x = 99000 – 45x

x = 1152

Hence, 1152 shares will be sold in Year 1

c.Cash flow = 1.8*2200 + 1152*37.5 = $47,160