An investor buys 100 shares of a $40 stock that pays an annual cash dividend of $2

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An investor buys 100 shares of a $40 stock that pays an annual cash dividend of $2 a share (a 5 percent dividend yield) and signs up for the dividend reinvestment plan.

a) If neither the dividend nor the price changes, how many shares will the investor have at the end of ten years? How much will the position in the stock be worth?

b) 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?

c) If the price of the stock rises by 6 percent annually but the dividend rises by only 3percent annually, 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? Since dividend plans credit fractional shares, use three decimal places in parts (b) and (c).

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
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