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You own 1,100 shares of stock in Avondale Corporation. You will receive a $2.60 per share...

Question:

You own 1,100 shares of stock in Avondale Corporation. You will receive a $2.60 per share dividend in one year. In two years, Avondale will pay a liquidating dividend of $75 per share. The required return on Avondale stock is 20 percent. Suppose you want only $2,000 total in dividends the first year. What will your homemade dividend be in two years ?

Homemade Dividends Taxation:

Homemade dividends involve selling stock and paying capital gains tax. The maximum capital gains tax in the US is currently 20%. Regular dividends, on the other hand are usually treated as income and are subject to regular income taxes. The top tax bracket is currently 39.6%.

Answer and Explanation:

We will start by computing the stock price in one year:

{eq}Price=\frac{Dividend}{(1+r)}\\ Price = \frac{75}{1+0.2}\\ Price = 62.5\\ {/eq}

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Homemade Dividends: Definition & Examples

from Finance 101: Principles of Finance

Chapter 16 / Lesson 2
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