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 annual dividend increases as 3.5 percent annually. What will be your capital gain be on this stock if you sell it 3 years from now?

2.91

2.43

To calculate the capital gain on the stock, we need to determine the future annual dividends and the future selling price of the stock.

First, let's calculate the future annual dividends for the next three years. We know that the dividend increases by 3.5 percent annually. So, the future annual dividends can be calculated as follows:

Year 1:
Dividend = $1.90 * (1 + 3.5%) = $1.90 * 1.035 = $1.9675 per share

Year 2:
Dividend = $1.9675 * (1 + 3.5%) = $1.9675 * 1.035 = $2.03450625 per share (rounded to 5 decimal places)

Year 3:
Dividend = $2.03450625 * (1 + 3.5%) = $2.03450625 * 1.035 = $2.105875984375 per share (rounded to 9 decimal places)

Next, we need to determine the future selling price of the stock. To calculate this, we can use the dividend discount model (DDM) formula, which is commonly used for valuing dividend-paying stocks:

Future Selling Price = Dividend / (Required Rate of Return - Dividend Growth Rate)

In this case, the required rate of return is 12 percent, and the dividend growth rate is 3.5 percent. Let's calculate the future selling price using the formula:

Future Selling Price = $2.105875984375 / (12% - 3.5%) = $2.105875984375 / 8.5% = $24.771488210294118 (rounded to 2 decimal places)

Finally, to calculate the capital gain, subtract the purchase price from the future selling price:

Capital Gain = Future Selling Price - Purchase Price

Note that the purchase price is not given in the question, so you'll need that information to calculate the capital gain accurately.

Keep in mind that this calculation assumes the stock is held for exactly three years and that the annual dividends are received at the end of each year. It also assumes that the stock is sold at the end of the third year.