Question

This morning you purchased a stock that just paid an annual dividend of $1.90 per share. You require a return of 10.5 percent and the dividend will increase at an annual growth rate of 2.8 percent. If you sell this stock in three years, what will your capital gain be?

A) $2.88

B) $2.50

C) $.71

D) $2.19

E) $2.80

Answer 1

Dividend just paid(D0) = $1.90 per share

Required return(ke) = 10.5%

Dividend annual growth rate(g) = 2.8%

- Calculating the Current Purchase Price of Stock using dividend growth model:-

P0 = $25.3662 per share

Purchase price of Stock = $25.37

- You sold the Stock in 3 years, calculating the Selling Price in 3 years of Stock using dividend growth model:-

P3 = $27.5572 per share

Selling Price of Stock = $27.56

- Capital Gain = Selling Price of Stock - Purchase price of Stock

Capital Gain = $27.56 - $25.37

Capital Gain = $2.19

Option D

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