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A company pays a current dividend of $1
A company pays a current dividend of $1.20 per share of common stock. The annual dividend will increase by 3%, 4% and 5%, respectively, over the next three years, and by 6% per year thereafter. The appropriate discount rate is 12%. The current price of the stock is $20.06. What is the capital gain or loss on the stock over the past year?
Expert Solution
Step 1: Introduction
Capital gain means the increase in price of security during the holding period. But if the security price falls instead of rising, then it is known as capital loss. To calculate capital gain/loss, firstly the price for both the years is calculated and then difference between the prices is calculated.
Step 2:solution
Firstly, the price before one year can be calculated as follows:
Price before one year=Present value of expected dividend+Present value of stock price Price before one year=$1.20+20.06(1+0.12)Price before one year=$18.9821
As the current market price is more than the price before one year. there is capital gain. It can be calculated as follows:
Capital gain=Current market price−Price before one yearCapital gain=$(20.06−18.9821)Capital gain=$1.0779
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