This morning, you purchased a stock that will pay an annual dividend of $1.90 per share next year. You require a 12 percent rate of return and the annual dividend increases at 3.5 percent annually. What will your capital gain be on this stock if you sell it three years from now?

To calculate the capital gain on the stock when sold three years from now, we need to calculate the future value of the annual dividend payments and the future selling price of the stock.

First, let's calculate the future value of the annual dividend payments after three years. The dividend increases at a rate of 3.5 percent annually, so we can use the formula for the future value of a growing annuity:

Future Value = P * (1 + g)^n

Where:
- P is the initial dividend payment ($1.90)
- g is the growth rate (3.5% or 0.035)
- n is the number of years (3)

Future Value = $1.90 * (1 + 0.035)^3
Future Value = $1.90 * (1.035)^3
Future Value = $1.90 * 1.107875
Future Value ≈ $2.10 (rounded to two decimal places)

Next, let's calculate the future selling price of the stock three years from now. To do this, we need to consider the capital gain and the required rate of return.

We want to find the future selling price that will yield a 12 percent rate of return. The formula for calculating the future selling price is:

Future Selling Price = Current Price * (1 + Rate of Return)^n

Where:
- Current Price is the current price of the stock (not given)
- Rate of Return is the required rate of return (12% or 0.12)
- n is the number of years (3)

Let's assume the current price of the stock is P0.

Future Selling Price = P0 * (1 + 0.12)^3
Future Selling Price = P0 * 1.404928

To calculate the capital gain, subtract the initial investment (price paid for the stock) from the future selling price. Since the initial investment is not given in the question, we can't determine the exact capital gain without that information.

Capital Gain = Future Selling Price - Initial Investment

Therefore, without knowing the initial investment, we can't calculate the exact capital gain on the stock when sold three years from now.