You purchases 100 shares of stock for $50 a share. The stock pays a $2 per share

Question

You purchases 100 shares of stock for $50 a share. The stock pays a $2 per share dividend at year-end.

a. what is the rate of return on your investment if the end-of-year stock price is (i) $48; (ii) $50; (iii) $55?

(Leave no cells blank-be certain to enter "0" wherever required. Enter your answers as a whole percent)

Stock price                     rate of return

$48                               _______%

$50                              _______%

$55                            ________%

b. what is your real (inlfation-adjusted) rate of return if the inflation rate is 3%? (Do not round intermediate calculation. Enter your answers as a percent rounded 2

decimal places. Negative amounts should be indicated by a minus sign)

stock price                       Real rate of return

$48                                       _______%

$50                                      _______%

$55                                     ________%

Explanation / Answer

When Price = 48; Price + Dividend = 48 + 2 = 50

Since this is the amount invested on the share return = 0% in the first case

When price = 50, price +dividend = 52

Return = 52/50 - 1 * 100% = 4%

When price = 55; return = 57/50 - 1 * 100% = 14%

b. inflation adjusted return = (1 + nominal return (calculated in a)) / (1 + inflation) - 1

When price = 48, real return = (1.0/1.3 - 1) % = -2.91%

when price = 50, rela return = (1.04/1.03 - 1)% = 0.97%

when price = 55 real return = (1.14/1.03 - 1)% = 10.68%

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