Carl Patterson likes investing in stocks that pay dividends. Carl owns 115 share
ID: 2776270 • Letter: C
Question
Carl Patterson likes investing in stocks that pay dividends. Carl owns 115 shares of a local utility company. The stock pays a regular annual dividend in the amount of $5.25 per share and the company has indicated that the dividend will stay the same for a long time. If Carl reinvests his dividends each year and the dividends earn a return of 4 percent each year, how much will Carl accumulate in 15 years? Use Exhibit 1-B. (Round time value factor to 3 decimal places and final answer to 2 decimal places.)
Explanation / Answer
We have:
Annual investment pmt = 115 x5.25 =603.75
Rate of return r=4%
N = 15 years
Since the amount of investment is same every year, we can use FV of annuity formula to calculate FV of this cash flow:
Future value = pmt x FVIFA(n,r)
=603.75 x FVIFA(15,4%)
=603.75 x20.024
= 12,089.24