Question

7. You have just purchased 100 shares of General Electric stock at $30 per share. You will sell the stock when its market price doubles. If you expect the stock price to increase 12% per year, how long do you expect to wait before selling the stock? Draw the cash flow diagram.

need cash flow diagram

Answer 1

The following cash flow diagram depicts the annual increase in the price of the stock till it doubles.

To draw the cash flow diagram we can make use of excel . The data required to draw the cash flow is shown below.

Year	Cash flow
0	-30
1	33.6
2	37.63
3	42.15
4	47.21
5	52.88
6	59.23
7	66.34

In excel go to insert, charts and select insert column or bar chart by selecting the above data.

Cash flow diagram 59.23 52.88 47.21 42.15 37.63 33.6 CASH FLOWS . YEAR

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The time required to wait before the stock doubles is calculated using the future value of investment equation.

Future value = Present value $\times$ ( 1 + growth rate)ⁿ

$ 60 = $ 30 $\times$ ( 1 + 0.12)ⁿ

Solving for the value of n in the above equation,

( 1 + 0.12)ⁿ = 2

Taking natural log on both sides of the equation,

n ln 1.12 = ln 2

n = (ln 2 $\div$ ln 1.12)

n = 6.12 years

Thus the investor has to wait for 6.12 years before selling the stock.