Kelsey Drums, Inc., is a well-established supplier of fine percussion instrument

Question

Kelsey Drums, Inc., is a well-established supplier of fine percussion instruments to orchestras all over the United States. The companys class A common stock has paid a dividend of $7.00 per share per year for the last 18 years. Management expects to continue to pay at that amount for the foreseeable future. Sally Talbot purchased 300 shares of Kelsey class A common 5 years ago at a time when the required rate of return for the stock was 16%. She wants to sell her shares today. The current required rate of return for the stock is 19%. How much capital gain or loss will Sally have on her shares?

The value of the stock when sally purchased it was $___ per share.

The value of the stock if Sally sells her shares today is $___ per share.

Explanation / Answer

Share price = Annual dividend/Required rate

The value of the stock when sally purchased it was $43.75 ($7/16%) per share.

The value of the stock if Sally sells her shares today is $36.84 ($7/19%) per share

Capital gains:

= 300×($36.84-$43.75)

= $2,073 Loss

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