1. You own 1,000 shares of Yahoo’s Stock. The required return on Yahoo’s share is 18%. You will receive a $3.40 per share dividend in one year. In two years, Yahoo will pay a liquidation dividend on $55 per share.
i. Compute the current stock price.
ii. If you wish to have an equal dividend in the next two years, how will you achieve that through homemade dividends? Assume dividends as annuity.
2. You have invested 500 shares of in Maxwell’s Company Limited. For the next three years, you will receive dividends of $2.50 per share in year one, $2.75 per share in year two and a liquidating dividend of $25.00 in year three. Assume Maxwell Ltd has a required return of12% and a dividend annuity.
i. What is the price of Maxwell’s stock today?
ii. If you wish to maintain an equal dividend cash flow in the next three year period, how will you accomplish this using the concept of homemade dividend?