You own 1,100 shares of stock in Avondale Corporation. You will receive a $2.40 per share...

Question:

You own 1,100 shares of stock in Avondale Corporation. You will receive a $2.40 per share dividend in one year. In two years, Avondale will pay a liquidating dividend of $72 per share. The required return on Avondale stock is 20 percent. Suppose you want only $600 total in dividends the first year. What will your homemade dividend be in two years?

Homemade Dividend:

A homemade dividend is cash that an investor receives by selling some of his/her stock. Even if the company is not paying dividends, an investor can always count on receiving homemade dividends.

Answer and Explanation:

You will receive a dividend of 1,100 * 2.40 = $2,640 next year. However, you want only $600

So, you can use the extra cash to purchase new shares...

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Homemade Dividends: Definition & Examples

from Finance 101: Principles of Finance

Chapter 16 / Lesson 2
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