Question

Common stock value—Zero growth Personal Finance Problem 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 $4.06 per share per year for the last 15 years. Management expects to continue to pay at that amount for the foreseeable future. Kim Arnold purchased 200 shares of Kelsey class A common 10 years ago at a time when the required rate of return for the stock was 8.1%. She wants to sell her shares today. The current required rate of return for the stock is 4.10%. How much total capital gain or loss will Kim have on her shares?
(Round to the nearest cent)

Answer 1

Answer: Given data. Perpetual constant Dividend = $4.06 Requuded Required Retuon 10 years ago = 8.ly. Return custent = 4.10% 50.123456 stock poice lo years ago = 4:06 0.081 = $ . current stock poice = 4.06 0.041 $99.024, - Total Purchase Value 10 years ago = 200X50.12 = $10,024, .: Total sale value = 2000 99.02 = $ 19,804,, - Total coftal 90in 19804 -10024 = $9,780,

Answer 2

SOLUTION :

Dividend paid for last 15 years is $4.06 per share each year and expected to be continued in future.

Kim purchased 200 shares 10 years ago.

Let price 10 years ago be $P per share.

10 years ago, rate of return was = 8.1% = 0.081

Rate of return possible when purchased = Dividend / P 

=> 0.081 = 4.06 / P 

=> P = 4.06/0.081

=> P = Price 10 years ago = 50.12 ($) per share. 

Let price today be $P’ per share.

Today, rate of return is = 4.10% = 0.041

Rate of return possible today = Dividend / P 

=> 0.041 = 4.06 / P’ 

=> P’ = 4.06/0.041

=> P’ = Price today = 99.02 ($) per share.  

Capital gain per share = P’ - P = 99.02 - 50.12 = 48.90 ($)

So,

Total capital gain to Kim on  purchase of 200 shares 10 years ago

= 200*48.90

= 9780 ($) (ANSWER)