Question

This morning you purchased a stock that just paid an annual dividend of $3.10 per share. You require a return of 9.2 percent and the dividend will increase at an annual growth rate of 4 percent. If you sell this stock in three years, what will your capital gain be?

Answer 1

Answer:

$2.48

Explanation:

This morining a stock was purchased.

The stock just paid an annual dividend of $3.10 per share

A return of 9.2% is required

= 9.2/100

= 0.092

The growth rate is 4%

= 4/100

= 0.04

The first step is to calculate today's price

= D1/(r-g)

=3.10× 1+0.04/0.092-0.04

= 3.10×1.04/0.092-0.04

= 3.224/0.052

= $62

The price at the end of year 3 can be calculated as follows

= today's price × (1+g)

= 62×(1+0.04)

= 62×1.04

= $64.48

Therefore, the capital gain can be calculated as follows

Price at the end of year 3-today's price

= $64.48-$62

= $2.48

Hence the capital gain is $2.48