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Homework answers / question archive / Ricardo owns 642 shares of Sonic Automotive stock
Ricardo owns 642 shares of Sonic Automotive stock. The company recently issued a statement that it will pay a $1.25 per share dividend this year and a $1.50 per share dividend next year. Ricardo does not need the cash from the dividend this year but does need as much cash as possible next year. He earns an average of 7 percent on his savings so that is the required return he established for this stock. Ignoring taxes, what will Ricardo's homemade dividend per share be next year?
A. $2.57 B. $2.67 C. $2.75
D. $2.84
E. $2.94
Answer
D.
Explanation
Computation of Ricardo's Homemade Dividend per Share:
Homemade dividend per share = (Dividend for this year * (1+ Required rate of return)) + Dividend for next year
= ($1.25 * (1 + 7%)) + $1.50
= $1.3375 + $1.50
= $2.8375
Homemade dividend per share = $2.8375 or $2.84
