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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 the end of 4 years.

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Expert Solution

Investment = 1000 x 45 = 45,000.

End of Year 1:

Stock price = 45. Dividend = 1.35 x no. of shares = 1.35 x 1,000 = 1350.

No. of shares received due to reinvestment = 1350/45 = 30 shares

End of Year 2:

Stock price = 45 + 13% = 50.85

Dividend/share = 1.35 + 6% = 1.43. Dividend =1.43 x 1030 = 1472.9.

No. of shares received due to reinvestment = 1472.9/50.85 = 29 shares.

End of Year 3:

Stock Price = 50.85+13% = 57.46.  

Dividend/share = 1.43 + 6% = 1.52. Dividend =1.52 x 1059 = $1609.68

No. of shares received due to reinvestment = 1609.68/57.46 = 28 shares.

End of Year 4:

Stock Price = 57.46+13% = 64.93.

Dividend/share = 1.52 + 6% = 1.61. Dividend =1.61 x 1087 = $1750.

SALES PROCEEDS at end of year 4 = no. of shares x stock price + year 4 dividend

= (1087 x 64.93) + $1750 = $72,328.9.

HPR = [(72,328.9 - 45,000)/45,000 ] x 100

HPR = 60%.  

jeff jeffy answered 2 years ago
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