Question

Target stock trades at $40 and participates in a dividend reinvestment program (DRIP). An investor holds 100 shares and participates in the DRIP. If the dividend yield is 5%, then which of the following correctly indicates a result of a dividend payment?

a. 100 shares held worth $4,200

b. 105 shares held worth $4,200

c. $4200 in shares and $200 in cash

d. $4000 in shares and $200 in cash

Answer 1

If the dividend yield is 5%, then the dividend paid is :

5% = Dividend paid/ stock price

So, the dividend paid is = $40 * 0.05

= $2

As the investor holds 100 shares. The total dividend received is 100 * $2 = $200. At market price of $40, the total number of shares repurchased is : $200/ $40

= 5 shares.

So, the total number of shares, the investor is holding now is 100 + 5 = 105 shares.

So, 105 shares held worth $4200 ( $40 * 100 + $200)

So, the correct option is option B.