Question

7. Rate of Return. 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? b. What are the dividend yield and percentage capital gain? c. Now suppose the year-end stock price after the dividend is paid is $36. What are the dividend yield and percentage capital gain in this case?

Answer 1

Answer:

a 15%

b dividend yield: 5%

  capital gain 10%

c if year-end price decrease to $36 then capital gain:

36/40 - 1 = -10%

negative 10%  thus, a 10% loss.

Explanation:

Beginning of the year price:: 40

At the end of the year:

dividends $ 2.00

Price: $44

Total rate of return:

(44 + 2) / 40 - 1 = 46/40 -1 = 0.15 = 15%

Dividend Yield: dividend per share/ price per share

$2 / 40 = 0,05 = 5%

capital gain:  end-year /beginning - 1

44 / 40 - 1 = 0.10 = 10%