Question

The closing price of shares of XYZ ltd on December 31 previous year was $25. It paid a yearend dividend as detailed below:

Year 1

$ 2

Year 2

$ 2

Year 3

$ 2.20

Year 4

$ 2.50

Year 5

$2.50

a. At what price should an investor sell his shares at the end of year 5 to earn a compound rate of return 15% on the initial investment (of $25), ignore commissions and fees.

b. “Dividends matter to investors”. Critically analyse.

Answer 1

Solution:
Investment Value		$25
Expected Return (Annual)		15%	Assuming compounded annually
Total Price Expected over 5 years		$ 25 X 1.15 (square 5 times))
Total Price expected		$50.28
Less: Cost		$25
Total Expected Return		$25.28
Returns already received in the form of dividend
		Interest Rate	Compounded Annually for years	Compounded for	Value at the end of 5 years
Year 1	$2	15%	4	1.15 square 4 times= 1.7490	$3.50
Year 2	$2	15%	3	1.15 square 3 times= 1.5208	$3.04
Year 3	$2.20	15%	2	1.15 square 2 times= 1.3225	$2.91
Year 4	$2.50	15%	1	1.15 square 1 times= 1.15	$2.88
Year 5	$2.50	15%	0	1.15 square 0 times	$2.50
Total Value of dividend received to be considered					$14.82
Total Return expected as above	$25.28
Less: Value of dividend	$14.82	(Compounded value)
Balance return to be received	$10.46
Cost Price	$25
Sale Price of Share	$35.46