Question

A stock is selling today for $40 per share. At the end of the year, it pays a dividend of $2 per share and sells for $44. a. What is the total rate of return on the stock?

Answer 1

Answer:

The total rate of return on the stock is 14%.

Explanation:

The sources of income from a stock are dividends and increase in its value. Therefore, the total rate of return on stock is calculated by dividing the addition of appreciation in the of the stock and dividends paid by the original stock price.

Therefore, the total rate of return on the stock can be calculated using the following formula:

Total rate of return = [(P1 - Po) + D] / Po .......................... (1)

Where;

P1 = Ending stock price = $44

Po = Initial stock price = $40

D = Dividend paid = $2

Substituting the values into equation (1), we have:

Total rate of return = [(44 - 40) + 2] / 44

Total rate of return = [4 + 2] / 44

Total rate of return = 6 / 44

Total rate of return = 0.14, or 14%