The Koster Co. currently pays an annual dividend of $1.00 and plans on increasing that amount by 5% each year. The Keyser Co. currently pays an annual dividend of $1.00 and plans on increasing its
Dividend by 3% annually. Given this, it can be stated with certainty that the _____ of the Koster Co.
Stock is greater than the _____ of the Keyser Co. stock.

Question

Quizplus · Accepted Answer

The rate of capital gain is determined by the growth rate of the dividend. Since Koster Co. has a higher dividend growth rate (5%) compared to Keyser Co. (3%), the rate of capital gain for Koster Co. is greater.