I've posted this question once already and really need help.
You buy 100 shares of XYZ at $40 per share.XZ pays an annual dividend of $2.00 and offers an automatic dividend reinvestment plan.Assume that the dividend will remain constant over the next 5 years and that the stock will increase 5% each year.How much will you XYZ investment be worth after 5 years if you partake of the dividend reinvestment plan?
To calculate the value of your XYZ investment after 5 years with dividend reinvestment, we need to consider the effect of the annual dividend and the increase in stock price each year. Let's break down the steps:
Step 1: Calculate the value of your investment after each year's dividend is reinvested.
- Year 1: You receive a dividend of $2.00 per share, and since you have 100 shares, you will receive a total dividend of $200. Assuming all dividends are reinvested, you will purchase additional shares at the current stock price of $40 per share. Therefore, you can buy $200/$40 = 5 additional shares.
- Year 2: The stock price has increased by 5%, so it is now $40 * 1.05 = $42 per share. You will receive a dividend of $2.00 * 105 shares = $210. This will allow you to purchase an additional 210/42 = 5 additional shares.
- Repeat this process for years 3, 4, and 5.
Step 2: Calculate the value of your investment after 5 years.
- After 5 years, you will own:
- Year 0: 100 shares
- Year 1: 100 + 5 = 105 shares
- Year 2: 105 + 5 = 110 shares
- Year 3: 110 + 5 = 115 shares
- Year 4: 115 + 5 = 120 shares
- Year 5: 120 + 5 = 125 shares
- To calculate the value, multiply the number of shares by the stock price at the end of year 5:
- Year 5 stock price = $40 * (1.05)^5 ≈ $50.96
- Value of investment after 5 years = 125 shares * $50.96/share ≈ $6,370
Therefore, your XYZ investment will be worth approximately $6,370 after 5 years if you partake in the dividend reinvestment plan.