Andahl Corporation stock, of which you own 500 shares, will pay a $2-per-share dividend one year from today. Two years from now Andahl will close its doors; stockholders will receive liquidating dividends of $17.5375 per share. The required rate of return on Andahl stock is 15 percent.
a. What is the current price of Andahl stock?
b. You prefer to receive equal amounts of money in each of the next two years. How will you accomplish this?
a. The price of Andahl stock would be the present value of the two cash flows, $ 2 in a year from now and $17.5375 in 2 years. The required return is the discounting rate to be used. Using the PVIF table, we get for 1 year and 15%, the factor is 0.870 and for 2 years it ...
The solution explains how to calculate the current price of stock and how to get equal amount of dividends when liquidating dividends are paid.