1. Mr. Toriop owns 5,000 shares of stock in YummyCorporation. The company has announced that it will pay a dividendof $5 per share in one year and a liquidating dividend of $50 pershare in two years. The required return on Yummy stock is 12%. (21 marks total)
a. What is the current share price of your stock? (1 mark)
b. What will be the company’s share price in one year’stime? (1 mark)
c. Mr. Toriop wishes to have equal amountsof dividend income for the next two years. How can he use homemadedividends to achieve this goal? Check that the present value of thecash flows will be the same as it is before the homemade dividends.(Hint: Dividends will be in the form of an annuity.)
d. Suppose Mr. Toriop is thinking about buying a housefor $220,000 in one year. How can he use homemade dividends toachieve this goal? Check that the present value of the cash flowswill be the same as it is before the homemadedividends.
e. Suppose Mr. Toriop is thinking about postponing thehouse purchase for two years, by which time the price of the housewill have increased by $46,800. How can he use homemade dividendsto achieve this goal? Check that the present value of the cashflows will be the same as it is before the homemadedividends.
