You bought 1000 shares of Micro, Inc. at 45. The stock paid a $1.35 annual dividend...

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 3 years. Calculate your HPR if you sold the stock at the end of 3 years.

Based on the information in #1, calculate the value of your stock investment plus the total cash received after 3 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 3 years.

Expert Solution

Calculation of HPR If we participated in the firm’s dividend reinvestment plan
Particulars	Year 0	Year 1	Year 2	Year 3
Dividend per share		1.35	1.431	1.51686
Shares at beginning	1000	1000	1030	1058
Dividend for shares held		1350	1473.93	1604.838
Price	45	45	50.85	57.4605
Equivalent Shares		30	28.98584	27.92941
Shares issued under reinvestment plan		30	28	27
Cash paid for difference as shares can not be issued in decimals			50.13	53.40438
Shares at end	1000	1030	1058	1085

Value of holding	45000	46350	53799.3	62344.64
				(Sale Value)


Holding Period Return = [(End Of Period/Sales Value − Initial Value)+ Income]/ Initial Value *100
=[(62344.64-45000)+50.13+53.40]/45000*100	38.77%	for 3 year
Holding Period Return p.a.	12.92%	p.a


If we have chosen to take the dividends in cash and not participate in the dividend reinvestment plan.
Particulars	Year 0	Year 1	Year 2	Year 3
Dividend per share		1.35	1.431	1.51686
Shares at beginning	1000	1000	1000	1000
Dividend for shares held		1350	1431	1516.86
Price	45	45	50.85	57.4605
Shares at end	1000	1000	1000	1000

Value of holding	45000	45000	50850	57460.5
				(Sale Value)


Holding Period Return = [(End Of Period/Sale Value − Initial Value)+ Income]/ Initial Value *100
=[(57460.5-45000)+1350+1431+1516.86]/45000*100	37.24%	for 3 year
Holding Period Return p.a.	12.41%	p.a

Since the stock price has been increasing, Dividend Re investment plan is better.

ekkarill92 answered 2 years ago

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You bought 1000 shares of Micro, Inc. at 45. The stock paid a $1.35 annual dividend...

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