Kelsey Drums, Inc., is a well-established supplier of fine percussion instrument
ID: 2790305 • Letter: K
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 $4 er share per year for the last 18 years. Management expects to continue to pay at that amount for the foreseeable future. Sally Talbot purchased 400 shares of Kelsey class A common 7 years ago at a time when the required rate of return for the stock was 14%. She wants to sell her shares today. The current required rate of return for the stock is 17%. How much total capital gain or loss will Sally have on her shares?
Explanation / Answer
Stock Price (Present value of zero growth stock) = Dividend / required rare of return ,
stock price ,when the required rate of return for the stock was 14% = $4 / 0.14
= $28.57
stock price ,when the required rate of return is 17% = $4 / 0.17
= $23.53
Total capital loss = ($23.53 - $28.57) * 400 shares
= ($5.04) * 400 shares
= ($2016)
Therefore, Sally will have total amount of capital loss on 400 shares of $2016.
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