You own $157,947.72 of Big Bucks Corp. stock. A year from now you expect a dividend of $1.00, $1.25 for the next two years and $1.35 for years four and five. At the end of year five you sell you stock for $45.78. Your dividends are taxed at 28% and your capital gains are taxed at 15%. You are expecting to earn 6% per year on your investment. How many shares (K) of stock do you own?
K = _____________shares
Let x be the number of shares owned
We would basically calculate all the future cash flows and discount them back to current
Year 1 cash flow = $1.00 * (1 - 28%) = $0.72
Present value of year 1 cash flow = $0.72 / (1 + 6%)^1 = $0.68
Year 2 cash flow ...
The solution calculates the number of shares given prospective dividend amounts.