Question

You buy 50 shares of abc stock at $30/share; stock currently pays $3/share in annual dividends. the price of the stock increases at 20%/year and dividends grow at 10%/year. if you participate in drip, how many abc shares will you have at the end of the second year? group of answer choices

a) 62.09 59
b) 17
c) none of the given answers is correct
d) 58.90
e) 56.34

Answer 1

Using a Dividend Reinvestment Plan (DRIP), after two years with an initial investment in 50 shares of stock from ABC company, accounting for annual stock price and dividend growth, you would have approximately 59.1685 shares. Therefore, the correct answer is not listed among the given choices.

Step-by-step explanation:

The question asks how many shares of ABC stock you will have at the end of the second year if you participate in a Dividend Reinvestment Plan (DRIP). We'll calculate the number of shares after the first and second year, accounting for the increase in stock price and dividend growth.

In the first year, the initial dividend is $3/share, and by the end of the year it increases by 10% to $3.30/share. With 50 shares, the total dividend is 50 * $3.30 = $165. Since the stock price increases by 20% from $30 to $36, the number of shares you can buy with the dividend is $165 / $36 = 4.5833 shares.

In the second year, the dividend increases by another 10% to $3.63/share. You now have 54.5833 shares, so the total dividend is 54.5833 * $3.63 = $198.137. The stock price increases by another 20% to $43.20, so the number of shares you can buy with the dividend is $198.137 / $43.20 = 4.5852 shares. Adding this to the existing shares, at the end of the second year you have 54.5833 + 4.5852 = 59.1685 shares, which means none of the given answers is correct.