Homemade Dividends
Response to the following problem:
You own 1,000 shares of equity in Avondale Property ASA. You will receive a 0.70 krone (NKr) per share dividend in one year. In two years, Avondale will pay a liquidating dividend of NKr40 per share. The required return on Avondale shares is 15 per cent. What is the current share price of your equity (ignoring taxes)?
If you would rather have equal dividends in each of the next two years, show how you can accomplish this by creating homemade dividends.
(Hint: Dividends will be in the form of an annuity.)