Common stock value-Zero growth: Personal Finance Problem- Kelsey Drums, Inc., is

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 $5 per share per year for the last 15 years. Management expects to continue to pay at that amount for the foreseeable future. Sally Talbot purchased 100 shares of Kelsey class A common 10 years ago at a time when the required rate of return for the stock was 16%. She wants to sell her shares today. The current required rate of return for the stock is 12%. How much total capital gain or loss will Sally have on her shares?

The value of the stock when Sally purchased it was $_______________ (Round to the nearest cent)

The value of the stock if Sally sells her shares today is $_________________ (Round to the nearest cent)

The total capital gain ( or loss) Sally will have on her shares is $________. (Round to the nearest dollar. Enter a positive number for a capital gain and a negative number for a loss.)

Explanation / Answer

Value of stock when purchased = Dividend paid/Required Rate of Return (at that time) = $5/0.16 = $31.25

Value of stock when sold = Dividend paid/Required Rate of Return (current) = $5/0.12 = $41,67

Total Capital Gain = No. of Shares x Capital Gain per share = 100 shares x $10.42*= $1,042

*Capital Gain per share = Sale Price of Share - Purchase price per share = 41.67 - 31.25 = $10.42

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