This morning, you purchased a stock that will pay an annual dividend of $1.90 per share next year.You require a 12 percent rate of return and the dividend increases at 3.5 percent annually.What will your capital gain be in dollars on this stock if you sell it three years from now?

Question

Quizplus · Accepted Answer

The correct answer is A because the capital gain is $2.43. The dividend is $1.90 per share next year, and it increases at 3.5 percent annually. So, the dividend in three years will be $1.90 * (1 + 0.035)^3 = $2.06. The required rate of return is 12 percent, so the price of the stock in three years will be $2.06 / 0.12 = $17.17. The capital gain is $17.17 - $14.74 = $2.43.

This Morning, You Purchased a Stock That Will Pay an Annual