The ECN Corporation is an all equity firm and its current financial manager plan to dissolve the firm in two years

Solution:

Given:

Dividend per share in one year= $0.6

Liquidating dividend= $60

required return on ECN stock = 18%

a) The Dividend, lily is supposed to receive by an year end = 0.6*1000= $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

Now, Lily has to create two equal dividends, which could be done with the "Homemade dividend".Homemade dividend is dividend which we receive after selling our holding shares.

By the end of the year, there is a capital gain of 18(118-100) per share, which means Lily has to sell around 334 (334*18= $6012)shares to create two equal dividends, one from the dividend and other from the seeling of shares.