An investor buys 100 shares of a $40 stock, that pays an annual cash dividend of

Question

An investor buys 100 shares of a $40 stock, that pays an annual cash dividend of $2 a share (a 5 percent dividend yield) and signs up for the dividend reinvestment plan. show work please

a. If neither the dividend nor the price changes. how many shares will the investor have at the end of ten years? how much will the position in the stock be worth?

b. if the price of the stock rises by 6 percent annually but the dividend remains at $2 a share, how many shares are purchased each year for the nect ten years? How much is the total position worth at the end of ten years?

c. if the price of the stock rises by 6 percent annually but the dividend rises buy only 3 percent annually, how many shares are purchased each year for the next ten years? how much is the total position worth at the end of ten years? since dividends plans credit fractional shares, use three decimal places in parts (b) and (c)

Explanation / Answer

Number of shares held = 100

Price per stock = $40 Cash Dividend = $2 per share @ 5% yield

Part a

If neither dividend nor Price changes :

Dividend received in one year = 100 shares * $2 = $200

Price per Stock = $40

Year

Investor will have 162.889 shares (155.133+7.757) at the end of 10 years

Position in stock will be worth $6,515.579 (162.889* $40)

Part b

Total position worth at end of ten years = 143.508* $71.634 = $10,280.027

Part c

Total position of net worth = 152.111 * $71.634 = $10,896.279

Year

Stock price ($) Dividend per share ($) number of shares held Total dividend No of shares obtained on reinvestment 1 2 3 2*3 = 4 4/1 1 40 2 100.000 200 5 2 40 2 105.000 210.000 5.250 3 40 2 110.250 220.500 5.513 4 40 2 115.763 231.525 5.788 5 40 2 121.551 243.101 6.078 6 40 2 127.628 255.256 6.381 7 40 2 134.010 268.019 6.700 8 40 2 140.710 281.420 7.036 9 40 2 147.746 295.491 7.387 10 40 2 155.133 310.266 7.757

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