An investor buys 100 shares of a $40 stock that pays an annual cash dividend of

Question

An investor buys 100 shares of a $40 stock that pays an annual cash dividend of $2 a share (a 5 percent dividend yield) and signs up for the dividend reinvestment plan. a) If neither the dividend nor the price changes, how many shares will the investor have at the end of ten years? How much will the position in the stock be worth? Number of shares=(100*1.05^10) = 162.889 Stock worth=162.889*40 = $6515.58 b) If the price of the stock rises by 6 percent annually but the dividend remains at $2 a share, how many shares are purchased each year for the next ten years? How much is the total position worth at the end of ten years? c) If the price of the stock rises by 6 percent annually but the dividend rises by only 3 percent annually, how many shares are purchased each year for the next ten years? How much is the total position worth at the end of ten years? Since dividend plans credit fractional shares, use three decimal places in parts (b) and (c).

Explanation / Answer

Since the dividend yield is given as 5%

so I assumed that dividend of $2 would be for D1

but if we assume given dividend of $2 is for D0

then share purchased for year 1 will be 4.858 but total ending share will be 152.093

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.