Assume that $10,000 was invested in the stock of General Medical Corporation wit

Question

Assume that $10,000 was invested in the stock of General Medical
Corporation with the intention of selling after one year. The stock pays
no dividends, so the entire return will be based on the price of the stock
when sold. The opportunity cost of capital on the stock is 10 percent.

a. To begin, assume that the stock sale nets $11,500. What is the dollar
return on the stock investment? What is the rate of return?

b. Assume that the stock price falls and the net is only $9,500 when
the stock is sold. What is the dollar return and rate of return?

c. Assume that the sale prices remain the same but the stock is held for two years. Now, what is the dollar return and rate of return?

Explanation / Answer

a.

Dollar return =11500-10,000=$1500

Rate of return =1500/10000=15%

B                      

Dollar return=(9500-10000)= -$500

Rate of return =(9500-10000)/10000= -0.05= loss of 5%

C

Rate of return = 0%

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