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.

Solutions

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 1 year ago

Next > < Previous

Related Solutions

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 4 years. Calculate your HPR if you sold the stock at...

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.

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...

You bought Sumsung stock for $45 on April 1. The stock paid a dividend of $2...

You bought Sumsung stock for $45 on April 1. The stock paid a dividend of $2 on July 1, and had a price of $55. It is now Oct. 1, and the stock price is $50. Treasury bills yield 1%. 1. What was the arithmetic average quarterly return? 2. What was the standard deviation of quarterly returns? 3. What's your best guess for the Sharpe ratio of Samsung stock for the next quarter?

QUESTION 7: You bought 250 shares of McWeber Inc. stock on margin. Price paid was $75...

QUESTION 7: You bought 250 shares of McWeber Inc. stock on margin. Price paid was $75 per share. The initial margin is 60%. The maintenance margin is 25%. A. What is the initial equity per share? (2 points) B. What is the loan amount per share? (2 points) C. How low can the price fall before there is a margin call? (2 points) D. Assume the price falls to $36. What is the amount of the margin call? (3 points)...

You bought 1000 shares of ABC stock on margin at the beginning of April 2012 at...

You bought 1000 shares of ABC stock on margin at the beginning of April 2012 at $4.80 per share. You deposited a 50% margin which was higher than the initial margin of 40%. The prime rate of interest was 2.5% and your broker charged 125 basis points above the prime rate on margin loan (assume simple interest rate). The stock paid a cash dividend of $0.12 per share in February and August of 2012. Your broker charged a flat fee...

A stock just paid an annual dividend of $2.7. The dividend is expected to grow by...

A stock just paid an annual dividend of $2.7. The dividend is expected to grow by 6% per year for the next 4 years. The growth rate of dividends will then fall steadily by 0.25% per year, from 6% in year 4 to 5% in year 8 and stay at that level forever. The required rate of return is 12%. What is the expected dividend in 8 years? What is the expected stock price in 8 years? What should be...

A stock just paid an annual dividend of $1.4. The dividend is expected to grow by...

A stock just paid an annual dividend of $1.4. The dividend is expected to grow by 10% per year for the next 4 years. The growth rate of dividends will then fall steadily from 10% after 4 years to 4% in year 8. The required rate of return is 12%. Question: 1. What is the stock price if the dividend growth rate will stay 4% forever after 8 years? 2. In 8 years, the P/E ratio is expected to be...

A stock just paid an annual dividend of $1.6. The dividend is expected to grow by...

A stock just paid an annual dividend of $1.6. The dividend is expected to grow by 9% per year for the next 4 years. The growth rate of dividends will then fall steadily from 9% after 4 years to 4% in year 8. The required rate of return is 12%. What is the stock price if the dividend growth rate will stay 4% forever after 8 years?

I bought preferred shares of a company. I paid $20 for eachshare and the dividend...

I bought preferred shares of a company. I paid $20 for each share and the dividend is $1.8 per share. From this investment, I want to earn 10%/year. What is the % return from this investment? Did I make a good decision?

Airlines Inc. just paid a $3.50 dividend, and it is expected to grow at 45% for...

Airlines Inc. just paid a $3.50 dividend, and it is expected to grow at 45% for the next 3 years. After 3 years the dividend is expected to grow at the rate of 4% indefinitely. If the required return is 9.8%, what is the stock's value today? ---This question needs to go into a spreadhseet on excel and I am unsure of the values for each row and column or the equations associated. A walkthrough would be greatly appreciated!---

Subjects