Question

You bought 1000 shares of Micro, Inc. at 45. The stock paid a $1.35 annual dividend in the year when you purchased the stock. In subsequent years, the dividend was increased 6 percent a year. The stock price stayed at 45 for the first year and then rose 13 percent a year. If you participated in the firm’s dividend reinvestment plan, calculate the value of your stock investment after 4 years. Calculate your HPR if you sold the stock at the end of 4 years.

Based on the information in #1, calculate the value of your stock investment plus the total cash received after 4 years if you had chosen to take the dividends in cash and not participate in the dividend reinvestment plan. Calculate your HPR if you sold the stock at the end of 4 years.

Answer 1

When the dividends are not reinvested
Year	No. of Shares	Dividend per Share	Total Dividends
1	1000	$                             1.35	$            1,350.00
2	1000	$                             1.43	$            1,431.00
3	1000	$                             1.52	$            1,516.86
4	1000	$                             1.61	$            1,607.87
Value of Shares at end of year 4:-
= 1000*45 * 1.13 * 1.13 * 1.13
$     64,930.37
So, Total Proceeds = Value of Shares at t = 4 + Dividends
Total Revenue=	$                  70,836.10
Holding Period Return=	57.41%

When the dividends are reinvested:-