(1) The stock of Trudeau Corporation went from $27 to $40 last year. The firm al
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Question
(1) The stock of Trudeau Corporation went from $27 to $40 last year. The firm also paid $1 in dividends during the same year. Thereafter, in the following year, the dividend was raised to $1.40. However, a declining market toward the end of the year caused the stock to fall to $24 per share from $40. Compute the rate of return (gain or loss) to the stockholder in the following year.
(2) Given the following financial data, compute the return on assets and return on equity: net income/sales = 8%, sales/total assets = 2.5X, and debt/total assets = 15%
Explanation / Answer
Solution for question 1
Value of investment that is purchase price of stock = $27
Dividend paid in first year = $1
At end of the first year stock price = $40
Return in first year = [{($40 - $27) + $1] / $27}
= 51.85%
Return in first year is 51.85%.
Again
Return in second year
Stock Price at end of second year = $24
Dividend paid in second year = $1.40
Return in second year = [{($24 - $40) + $1.40] / $27}
= -36.50%
Return in second year is -36.50%.
Again return in first two year
Return in first year = [{($24 - $27) + $1 + $1.40] / $27}
= -0.22%
Return in first two year is -.22%.
Solution for question 2
Net income / Sale = 8%
Sales / Total Assets = 2.5X
Return on assets is calculated by net income divided by total assets.
So Return on Assets = Net income / Sale × Sales / Total Assets
= 8% × 2.5X
= 20%
Return on assets is 20%.
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