Drums, Inc, is a well-established supplier of fine percussion instruments to orc

Question

Drums, Inc, is a well-established supplier of fine percussion instruments to orchestras all last 20 years Management expects to continue to Common stock value-Zero growth Personal Finance Probiem over the United States. The company's class A common stock has paid a dividend of $9 per share per year for the pay at that amount the stock was 12% She wants to sell her shares today The current required rate of return tor the stock 1 her shares? 100 shares of-Kelsey class A common 7 years ago at a time when the required rate of return for 7%. How much total capital gan or loss wm sary have on The value of the stock when Sally purchased it was per share (Round to the nearest cent) The value of the stock if Sally sells her shares today is sl per share (Round to the nearest cent) The total Capital gan (or loss) Sally wil have on her shares s (Round to the nearest doilar Enter a positive number for a capital gain and a negative number for a loss)

Explanation / Answer

First Image Answer

1. Value per share at the time of purchase

Using Gordon's Formula P = D1 / ( Ke - g )

D1 = Dividend in next year = since given, same dividend will be paid in future also = $ 9

Ke = Return on Stock = 12 %

g = 0 , since given, same dividend will be paid in future also

Accordingly ,

P = D1 / ( Ke - g )

= 9 / ( 0.12 - 0 )

= $ 75 per Share

2. Value per share at the time of Sale

Using Gordon's Formula P = D1 / ( Ke - g )

D1 = Dividend in next year = since given, same dividend will be paid in future also = $ 9

Ke = Return on Stock = 17 %

g = 0 , since given, same dividend will be paid in future also

Accordingly ,

P = D1 / ( Ke - g )

= 9 / ( 0.17 - 0)

= $ 53 per share

3. Capital gain / loss

Value per Share at the time of Purchase = $ 75

Value per Share at the time of Sale = $ 53

Capital Loss Per Share = - $ 22

Capital Loss for 100 Shares = - $ 2200

Second Image Answer

After tax cost of finance = Coupon rate X ( 1- tax rate )

= 5 % X ( 1- 35 % )

= 3.25 %

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