Question

Albert owns 1 share of stock A and 1 share of stock B. In 1 year from today, the total value of his holdings is expected to be 214.32 dollars. Stock A is currently priced at 87.46 dollars, has an expected return of 12.35 percent, and is expected to pay a dividend of 6.39 dollars in 1 year from today. Stock B is currently priced at 114.9 dollars and has an expected return of 11.88 percent. What is the amount of the annual dividend that stock B is expected to pay in 1 year from today?

Answer 1

Return on stock= (Dividend + Capital gain)/Beginning price.

Capital Gain= End price- Beginning price

It is given that:

Current price of stock A= $87.46

Expected return on stock A in 1 year =12.35%

Expected dividend of stock A= $6.39

Therefore, expected price of stock A in 1 year= Current price + (Current price*Return – Dividend)

= $87.46 + ($87.46*12.35%-$6.39) = $ 91.87

Also given that total value of stocks A and B together in 1 year= $214.32

Therefore, value of stock B in 1 year= $214.32-$ 91.87 = $122.45

Current price of stock B= $114.90

Appreciation on stock B expected= $122.45-$114.90= $7.55

Expected return on stock B= 11.88%

Therefore, expected dividend on stock B= (Current value*Return)-Dividend

=($114.90*11.88%)-$7.55 = $6.10