a) Stock dividends and stock splits do not affect the wealth of shareholders in a perfect world. We continue to see the share price responding favorably to such announcements. Explain the reason for such behavior?
b) You have invested 200 shares in Maxwell’s Company Limited. For the next three years you will receive dividends of $1.50 per share in year one, $1.75 per share in year two and a liquidating dividend of $15.00 in year three. Assume Maxwell Ltd has a required rate of return of 15 percent and dividend is an annuity.
(i) What is the price of Maxwell’s stock today?
(ii) You wish to maintain an equal dividend cash flow through the three year period, how would you accomplish this using the concept of homemade dividend?