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 company's class A common stock has paid a dividend of $11 per share per year for the last 17 years. Management expects to continue to pay at that amount for the foreseeable future. Sally Talbot purchased 300 shares of Kelsey class A common 10 years ago at a time when the required rate of return for the stock was 15%. She wants to sell her shares today. The current required rate of return for the stock is 12%. How much total capital gain or loss will Sally have on her shares?

a. the value of the stock when Sally purchased it was $____ per share

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

c. the total capital gain (or loss) sally will have on her shares is $___

Explanation / Answer

a. The value of the stock when Sally purchased it Market Price= Next Year'sDividend/( Reqd.return-Growth Rate) =11/(0.15-0) 73.33 Per Share b. The value of the stock if Sally sells her shares today =11/(0.12-0) 91.67 Per Share c. The total capital gain sally will have on her shares is (Value of stock today- Purchase price of stock)*No.of Shares (91.67-73.33)*300 5502

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