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his morning you purchased a stock that just paid an annual dividend of $2.20 per share....

his morning you purchased a stock that just paid an annual dividend of $2.20 per share. You require a return of 9.3 percent and the dividend will increase at an annual growth rate of 3.1 percent. If you sell this stock in three years, what will your capital gain be?

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Answer #1

The capital gain is computed as shown below:

= Price of stock in 3 years - purchase price of stock

Purchase price of stock is computed as follows:

= Dividend just paid (1 + growth rate) / ( required rate of return - growth rate)

= $ 2.20 (1 + 0.031) / ( 0.093 - 0.031)

= $ 36.58387097

Price of stock in 3 years is computed as follows:

= Current stock price (1 + growth rate)3

= $ 36.58387097 x 1.0313

= $ 40.09273214

So, the capital gain yield will be as follows:

= $ 40.09273214 - $ 36.58387097

= $ 3.51 Approximately

Feel free to ask in case of any query relating to this question

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