Question

. Three years ago, your client purchased 500 shares of Bravo common stock for $20/share. In the first year, a dividend of $1.25 was paid. In the second year, a dividend of $1.50 was paid. In the third year, a dividend of $2.00 was paid. If the holding period return was 18%, how much could the holding be sold for today?

Answer 1

Holding period return, rs = 18%

Purchase price, P0 = $20.00
Dividend in first year, D1 = $1.25
Dividend in second year, D2 = $1.50
Dividend in third year, D3 = $2.00

Selling price, P3 = ??

P0 = D1/(1+rs) + D2/(1+rs)^2 + D3/(1+rs)^3 + P3/(1+rs)^3
$20.00 = $1.25/1.18 + $1.50/1.18^2 + $2.00/1.18^3 + P3/1.18^3
$20.00 = $1.0593 + $1.0773 + $1.2173 + P3*0.608631
$16.64641 = P3*0.608631
P3 = $27.35

Selling price of the holding shares is $27.35