Darlene wishes to purchase 200 shares of The-Smart-One Inc. in 4 years from now. The-Smart-One paid a dividend of $2.25 per share last year (t = 0). It is expected that the dividend will grow at a rate of 2% for this and the next year (t = 1 and t = 2 respectively), after which it will settle into a 1% growth rate for an indefinite time in future. Darlene requires a return of at least 6% from her investment.

Question 1:

How much will be the total cost of Darlene's purchase of 200 shares 4 years from now?

Answer: Each share will cost $48.40 and the total cost of purchase will be $9,680

Question 2:

How much does Darlene need to deposit in her bank today so that she has $9,680 in her account by the time she is ready for her stock purchase. Assume that the bank pays 1.75% p.a. on deposits.

Answer: $9,031.04

Question 3:

If Darlene wanted to make annual deposits at the end of each year to accumulate $9,680, how much would she need to deposit each year?

Answer: $2,357.39 each year

Question 4:

Which of the two type of deposits will be better?

Answer:

Both options are almost equal. The second option is cheaper by 1 cent approximately.