Answer:
$1.81
Explanation:
we must use a combination of non-constant growth formula and the Gordon growth model to determine the price for the stocks in year 0 and year 1:
stock price year 0 = ($2.40 / 1.15) + ($2.88 / 1.15²) + ($3.456 / 1.15³) +[$4.1472 / (15% - 4%)] / 1.15⁴ = $2.09 + $2.18 + $2.27 + $21.55 = $28.09
stock price year 1 = ($2.88 / 1.15) + ($3.456 / 1.15²) +[$4.1472 / (15% - 4%)] / 1.15³ = $2.50 + $2.61 + $24.79 = $29.90
capital gain between year 0 and year 1 = P1 - P0 = $29.90 - $28.09 = $1.81
*All answers have been rounded to the nearest cent.
Answer:
$1.81
Explanation:
Applying the Non constant growth formula and the Gordon's model
The Non constant growth formula :
[tex]P_{0} = \frac{D1V1}{1 + r} +\frac{D2V2}{(1+r)^{2} } +\frac{D3V3}{(1+r)^{3} } + \frac{DnVn}{(1+r)^{n} }[/tex]
D1V1 = dividend in year 1
D2V2 = dividend in year 2
r = discount rate
Po = price of stock at year 0
Pn = price of stock year n
therefore to get the stock price at year 0 and year 1 we will apply the above formula + the Gordon model formula
stock price year 0 = ($2.40 / 1.15) + ($2.88 / 1.15²) + ($3.456 / 1.15³) +[$4.1472 / (15% - 4%)] / 1.15⁴ = $2.09 + $2.18 + $2.27 + $21.55 = $28.09
stock price year 1 = ($2.88 / 1.15) + ($3.456 / 1.15²) +[$4.1472 / (15% - 4%)] / 1.15³ = $2.50 + $2.61 + $24.79 = $29.90
therefore the capital gain between year 0 and year 1
= P1( price of stock at year 1)- Po (price of stock at year 0)= $29.90 - $28.09 = $1.81
