Javier is considering making a 4 year investment in Guggenheimer Jewelry. The cost to purchase the stock is $500 and he would only purchase 1 share. Javier expects 15% rate of return. Guggenheimer Jewelry typically increases the dividends paid to share holders by 10% each year; last year they paid $100 as an annual dividend. Break down the problem. I need a detailed breakdown of the calculations please…
To calculate the investment return over the 4-year period, we need to consider both the annual dividends paid by Guggenheimer Jewelry and the increase in stock price.
Here's a breakdown of the calculations:
1. Calculate the annual dividends over the 4-year period:
- Start with the dividend paid last year: $100
- Assume the dividends increase by 10% each year
- Year 1 dividend: $100 * (1 + 10%) = $110
- Year 2 dividend: $110 * (1 + 10%) = $121
- Year 3 dividend: $121 * (1 + 10%) = $133.10
- Year 4 dividend: $133.10 * (1 + 10%) = $146.41
2. Calculate the ending stock price after 4 years:
- Start with the initial stock price: $500
- Calculate the increase each year based on a 15% rate of return
- Year 1 stock price: $500 * (1 + 15%) = $575
- Year 2 stock price: $575 * (1 + 15%) = $661.25
- Year 3 stock price: $661.25 * (1 + 15%) = $760.43
- Year 4 stock price: $760.43 * (1 + 15%) = $874.48
3. Calculate the total dividend received over 4 years:
- Total dividends: Year 1 dividend + Year 2 dividend + Year 3 dividend + Year 4 dividend
- Total dividends: $110 + $121 + $133.10 + $146.41 = $510.51
4. Calculate the total return:
- Subtract the initial investment ($500) from the ending value of the stock and add the total dividends received:
- Total return: $874.48 - $500 + $510.51 = $885.99
So, Javier can expect a total return of $885.99 on his 4-year investment in Guggenheimer Jewelry.