Kelsey Drums, Inc., is awell-established supplier of fine percussion instruments

Question

Kelsey Drums, Inc., is awell-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 $6 per share per year for the last 19 years. Management expects to continue to pay at that amount for the foreseeable future. Sally Talbot purchased 200 shares of Kelsey class A common 7 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 19%.

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 $______. (Round to the nearest dollar. Enter a positive number for capital gain and a negative number for a loss).

Explanation / Answer

Price per share = dividend / required rate

a)

price = 6 / 15% = 40

b)

price = 6 / 19% = 31.5789

c)

capital loss per share = 31.5789 - 40 = -8.4211

total capital loss = 200*(-8.4211) = -1684.21

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