Question

ABC plans to pay dividends of

80, and
150 (per share)
liquidating dividend in year 4. You own 150 shares of stock. The required return on the stock is 10%.
a) If you want equal dividends in each of the four years, how many shares you must buy/sell in each
year? (Positive value for buy and negative value for sell)
b) Redo part a) if you want total dividends of
12,000 in year 2 and year 3 respectively and
equal amount in year 1 and year 4.

Answer 1

To calculate the number of shares you need to buy/sell in each year to receive equal dividends, use the concept of present value and divide the present value of the liquidating dividend in year 4 by the present value of the regular dividends in years 1, 2, and 3. Adjust the calculations in part b) by subtracting the total dividends in year 2 and year 3 and dividing the remaining dividends equally between year 1 and year 4.

Step-by-step explanation:

To calculate the number of shares you need to buy/sell in each year to receive equal dividends, you can use the concept of present value. The present value of the dividends in year 4 can be calculated as:

Present Value (PV) = Dividend / (1 + required return)^number of years

Using this formula, you can calculate the present value of the liquidating dividend in year 4, and then divide it by the present value of the regular dividends in years 1, 2, and 3 to determine the ratio of shares you need to buy/sell. Repeat this calculation for each year to determine the number of shares to buy/sell in each year.

In part b), you would need to adjust the calculations by subtracting the total dividends in year 2 and year 3 and dividing the remaining dividends equally between year 1 and year 4.