Question

McNutt Corporation is expected to pay a cash dividend on its common stock of $2.30 per share in one year, $2.45 per share in two years, and a dividend of $2.60 per share in three years. Your analysis indicates that you think you will sell the stock for a market price of $35.00 per share in three years. The current risk-free rate is 2.20% while the appropriate rate of return for the risks involved in owning Collins corporation stock is 10% What will be the capital gain per share in the third year (rounded to two decimal places)

Answer 1

Capital Gain 2.40%

Step-by-step explanation:

Investor will desire a 10% return on the Stock

Thus:

Divident yield + Capital Gain = 10%

Capital Gain will be:

Third year price less second year price = 35 - 2nd Y Price

We can now make a formula:

2.60 Dividend Yield + 35 - Second Year Price

------------------------------------------------------------------ = 0.10

Second Year Price

Let's call Second Year Price = X

2.6 + 35 - X = 0.10X

37.6 = 1.1X

37.6/1.1 = X = 34,18

Having the Second year Price now we solve for the capital gain:

(35 - 34.18) / 34.18 = 0,02399 = 2.40%