This morning, you purchased a stock that will pay an annual dividend of $1.90 per share next year. You require a 12 percent rate of return and the dividend increases at 3.5 percent annually. What will your capital gain be in dollars on this stock if you sell it three years from now?

$2.4302 per share

Explanation:

The computation of the capital gain in dollars is shown below:

Price at the end of third year - price of share now

where,

Price at end of 3 year = Dividend year 4  ÷ (0 .12 - .035)

                                   = $2.10656 ÷ 0.085

                                   = $24.7831 per share

The Dividend of year 4 is come from

= $1.90 × (1 + .035 )^3

= $1.90 × (1.035)^3

= $2.10656

And,

Price at end of 3 year is

= Dividend at year 4  ÷ ( .12 - .035)

= $2.10656 ÷ .085

= $24.7831 per share

And,

Price of share now is

= $1.90 ÷ (.12 -.035)

= $1.90 ÷ .085

= $22.3529

So,

Capital gain is

= $24.7831 - $22.3529

= $2.4302 per share

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