Question
Smith holds 100,000 shares of stock in Avondale Corporation. Each year, he received $1 dividend per share from Avondale. Recently, Smith considers moving from Florida
Smith holds 100,000 shares of stock in Avondale Corporation. Each year, he received $1 dividend per share from Avondale. Recently, Smith considers moving from Florida to California and expects that he will need to double his living expense. Therefore, Smith plans to sell stocks of Avondale Corporation and purchase stocks of Bravo Corporation, which pays $2 dividend per share. In fact, Avondale and Bravo are identical except the dividend policy. John suggests that Smith does not need to change his stock investment and can create a cash flow stream equivalent to $2 dividend per share by holding Avondales stock. What is the strategy in Johns mind?
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