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The ECN Corporation is an all equity firm and its current financial manager plan to dissolve...

The ECN Corporation is an all equity firm and its current financial manager plan to dissolve the firm in two years. The corporation has announced that it will pay $0.6 per share dividend to shareholders in one year. In two years, ECN will pay a liquidating dividend of $60 per share. The required return on ECN stock is 18%. Lily owns 10,000 shares in the company.

  1. What will Lily’s dividend income be this year if she uses homemade dividends to create two equal annual dividend payments
  2. What will Lily’s dividend income be in year two if she only wants $ 1,500 total in dividend in year one.

Solutions

Expert Solution

GIVEN:

Dividend per share in one year= $0.6

Liquidating dividend= $60

required return on ECN stock = 18%

The Dividend, lily is supposed to receive by an year end

                                                  = =$6000

When Lily uses homemade dividends to create two equal annual dividend payments which is=$6000+$6000=$12000

Suppose the current price of the ECN stock is "x"

By the end of year one:

the price of the ECN stock rises above by 18% of the current price= x+18%of x= 1.18x

So,if we assume the current price of the ECN stock to be 100 or x=100 then, the price in the end of the year would be 118.

Current values of the 10,000 shares= $1000000

value of the shares in the one year= 118*1000= $118000

Total capital gain= 118000-100000= $18000

gain per share= 18000/10000= $18

ekkarill92 answered 2 years ago
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