Essay: Purchase of Stock
Wednesday, the 12th of May is the record date. However, it takes usually some days’ time for the clearing of share purchases to take place at the stock exchange which is why investors have to purchase stock earlier for dividends. This is normally two days, which means Morris can purchase stock by the 10th of May and still receives dividends.
It begins trading ex-dividend follow 10th of May after purchases will not give dividends on shares in the year.
The price of the share should drip by the dividend per share paid as that much value of the company has been paid off to shareholders.
Required return = 15%
Fee for bank = 6% of 5,000,000 = $300,000
Price per share expected = $12
Number of shares to be purchased in one year = 200,000
Profit = (12-5) x 200,000 = $1,400,000
Present Value of underwriting compensation = 300,000 + 1,400,000 / (1.15)