Question

If the price of the stock rises by 6 percent annually but the dividend remains at $2 a share, how many shares are purchased each year for the next ten years? How much is the total position worth at the end of ten years?

Answer 1

Number of Shares = 143.51

Total Position Worth = $ 10,279.62

Step-by-step explanation:

There are four steps that are going to be followed for the solution

First Step:Determine the total Dividend amount

Dividend = No. of shares * dividend of one share

Second Step: Share price increases by 6 % at the end of every year. Calculate that by using the formula

Share Price = Previous year share price*(1+0.06)

Third Step: Determine the shares when dividends are invested again

Dividend Reinvestment = Total Dividends/Share Price at the end of every year

Fourth Step: Closing balance = Opening Share balance + Dividend Reinvestment

Following these steps

For First year

Consider there are 100 shares and price of one share is $40

Dividend= 100*2=200

Share price at the end of year = 40*(1+0.06)= 42.4

Dividend Reinvestment=200/42.4=4.71

Closing Balance=100+4.71=104.71

For Second Year

Dividend= 104.71*2=209.43

Share price at the end of year = 42.4*(1+0.06)= 44.94

Dividend Reinvestment=209.43/44.94=4.68

Closing Balance=104.71+4.68=109.377

Repeat this process for 10 years.