Final answer:
To earn a 16 percent total return on the stock, considering an investment of $26 and quarterly dividends of $.32, the stock price must be $28.88 one year from now. This accounts for both dividends received and the capital gain needed to achieve the desired result.
Step-by-step explanation:
To calculate the future stock price required to achieve a total return of 16 percent for the year, we need to take into account both the dividends received and the capital gain from the increase in stock price.
The stock pays a dividend of $.32 per share each quarter, so for a year, the total dividends will be $3.2 ' 4 = $1.28. If we denote the future stock price as P, to achieve a 16 percent return on the initial investment of $26, the following equation should be satisfied:
- 16% of $26 initial investment = $26 ' 0.16 = $4.16
- Total return = Dividends + Capital Gain = $1.28 + (P - $26)
- $4.16 (Total return) = $1.28 (Dividends) + (P - $26) (Capital Gain)
We can solve this equation for P:
$4.16 = $1.28 + (P - $26)
$4.16 - $1.28 = P - $26
$2.88 = P - $26
P = $2.88 + $26
P = $28.88
Therefore, the stock price must be $28.88 one year from now for the investor to earn a total return of 16 percent for the year. The correct answer is B) $28.88.