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17 July, 21:52

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?

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  1. 18 July, 01:23
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    Number of Shares = 143.51

    Total Position Worth = $ 10,279.62

    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.
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