A person has much of his savings invested in 15,000 shares of Grass Roots common stock....

A person has much of his savings invested in 15,000 shares of Grass Roots common stock. The stock is currently selling for $12 per share and has been paying a dividend of $.75 per share. Grass Roots has discontinued its dividend but begins to grow at 7% a year. Assuming no transaction costs.

Q. How can this person maintain his income and his position in the firm at the end of the year?

Expert Solution

Position when Company was giving a dividend

Value of Investment : $180,000 (15000 shares @ $12 per share)

Dividend Income : $11,250 ( $.75 per share for 15,000 shares)

Return on Investment (assuming value of investment = cost of investment) = 11,250/180,000*100 = 6.25%

Position when Company is not paying dividend

Cost of Investment : $180,000

Value of Investment at the end of the year : $180,000 * 1.07 = $192,600

Return on Investment =7%

To maintain the income and his position in the firm:

He can buy a call option of that share at strike price $12 per share and exercise this option when the share reaches at $12.84 (assuming 7% growth).In this way, he can earn the income of $12,600(this amount is before deducting premium to be paid on call option).After deducting premium , he will be able to maintain his income of $11,250.

Another way is he can do the margin trading on the amount in his demat account and earn the income on appreciation of stock.

Please note by income it is assumed it meant realised income.

ekkarill92 answered 3 months ago

Q7) Lin has $100000.00 invested in the stock market and $50000.00 in his savings account. At...

Q7) Lin has $100000.00 invested in the stock market and $50000.00 in his savings account. At the end of each year, he looks at the total of his investments and transfers money from one to the other so that his stock market investment is again twice as much as his savings account. His savings account always pays 3% compounded quarterly. a) In the first year, his stock market investment earns 4.00% (effective annual rate). How much money does he transfer...

Mike withdrew $1,180 from a savings account and invested in common stock. At the end of...

Mike withdrew $1,180 from a savings account and invested in common stock. At the end of 5 years, Mike sold the stock for $1,387. In the savings account he would have received an interest rate of 4%, compounded quarterly. He would like to compute a comparable interest rate on his common stock investment. a) Draw a cash flow diagram for the stock investment .b) What effective annual interest rate did he receive from the stock investment? c) Based on quarterly...

An individual has $15,000 invested in a stock with a beta of 0.5 and another $60,000...

An individual has $15,000 invested in a stock with a beta of 0.5 and another $60,000 invested in a stock with a beta of 1.3. If these are the only two investments in her portfolio, what is her portfolio's beta? Do not round intermediate calculations. Round your answer to two decimal places.

A person has 43,000 invested un stock A and stock B. Stock A currently sells for...

A person has 43,000 invested un stock A and stock B. Stock A currently sells for $30 a share abd stock B sells for $80 a share. If stock B doubles in value and stock a goes up 50% his stock will be worth $84,000. How many shares of each stock does he own?

1.An individual has $15,000 invested in a stock with a beta of 0.5 and another $50,000...

1.An individual has $15,000 invested in a stock with a beta of 0.5 and another $50,000 invested in a stock with a beta of 1.6. If these are the only two investments in her portfolio, what is her portfolio's beta? Do not round intermediate calculations. Round your answer to two decimal places. 2.Assume that the risk-free rate is 7.5% and the required return on the market is 9%. What is the required rate of return on a stock with a...

Convertible Securities and Earnings per Share Percy Company has 15,000 shares of common stock outstanding during...

Convertible Securities and Earnings per Share Percy Company has 15,000 shares of common stock outstanding during all of 2019. It also has 2 convertible securities outstanding at the end of 2019. These are: Convertible preferred stock: 1,000 shares of 9%, $100 par, preferred stock were issued in 2015 for $140 per share. Each share of preferred stock is convertible into 3.5 shares of common stock. The current dividends have been paid. To date, no preferred stock has been converted. Convertible...

Madrid Corporation has 15,000 shares of $70 par common stock outstanding. On June 8, Madrid Corporation...

Madrid Corporation has 15,000 shares of $70 par common stock outstanding. On June 8, Madrid Corporation declared a 3% stock dividend to be issued August 12 to stockholders of record on July 13. The market price of the stock was $103 per share on June 8. Journalize the entries required on June 8, July 13, and August 12. For a compound transaction, if an amount box does not require an entry, leave it blank. If no entry is required, select...

On January 1, NewTune Company exchanges 15,000 shares of its common stock for all of the...

On January 1, NewTune Company exchanges 15,000 shares of its common stock for all of the out- standing shares of On-the-Go, Inc. Each of NewTune’s shares has a $4 par value and a $50 fair value. The fair value of the stock exchanged in the acquisition was considered equal to On-the-Go’s fair value. New Tune also paid $25,000 in stock registration and issuance costs in connection with the merger. Several of On-the-Go’s accounts’ fair values differ from their book values...

Kyle invested $15,000 in a savings account. If the interest rate is 5% per year, how...

Kyle invested $15,000 in a savings account. If the interest rate is 5% per year, how much will be in the account in 10 years for monthly compounding? Round your answer to the nearest cent. Do NOT round until you calculate the final answer Provide your answer below:

McKinley Company owns 15,000 of the 50,000 outstanding shares of Ranier Corporation common stock and can...

McKinley Company owns 15,000 of the 50,000 outstanding shares of Ranier Corporation common stock and can exert significant influence over Ranier. During 2022, Ranier earns $350,000 and pays cash dividends of $140,000. What is the 2022 effect on McKinley’s Retained Earnings? Select one: a. $63,000 b. $147,000 c. $105,000 d. $56,000 e. $42,000

Question