Question

This morning you purchased a stock that just paid an annual dividend of $1.70 per share....

This morning you purchased a stock that just paid an annual dividend of $1.70 per share. You require a return of 9.5 percent and the dividend will increase at an annual growth rate of 2.6 percent. If you sell this stock in three years, what will your capital gain be?

rev: 10_01_2019_QC_CS-183699

  • $2.66

  • $2.02

  • $2.60

  • $.66

  • $2.31

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Homework Answers

Answer #1

D0 = $1.70

D1 = D0 * (1 + g) = $1.70 * (1.026) = $1.7442

D2 = D1 * (1 + g) = $1.7442 * (1.026) = $1.78955

D3 = D2 * (1 + g) = $1.78955 * (1.026) = $1.836

P0 = D1 / (Ke - g)

P0 = $1.7442 / (0.095 - 0.026) = $25.28

P1 = P0 * (1 + Ke) - D1

P1 = $25.28 * (1.095) - $1.7442 = $25.94

P2 = P1 * (1 + Ke) - D2

P2 = $25.94 * (1.095) - $1.78955 = $26.61

P3 = P2 * (1 + Ke) - D3

P3 = $26.61 * (1.095) - $1.836

P3 = $27.30

Capital gain if stock is sold after 3 years = P3 - P0

= $27.30 - $25.28

= $2.02

So, capital gain in dollars = $2.02

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