You purchase 100 shares of stock for $60 a share. The stock pays a $3 per share
ID: 2766948 • Letter: Y
Question
You purchase 100 shares of stock for $60 a share. The stock pays a $3 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) $57; (ii) $60; (iii) $66? (Leave no cells blank - be certain to enter "0" wherever required. Enter your answers as a whole percent.) Stock price Rate of return $57 % $60 % $66 % b. What is your real (inflation-adjusted) rate of return if the inflation rate is 4%? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Negative amounts should be indicated by a minus sign.) Stock price Real rate of return $57 % $60 % $66 %
Explanation / Answer
Price at Beginning
$ 60
No. of Shares
100
Dividend
$ 3
(i)
Return if, Year end price
$ 57
Return
($ 57 - $ 60)+ $ 3
$ 60
Return = 0
(ii)
Return if, Year end price
$ 60
Return
($ 60 - $ 60)+ $ 3
$ 60
Return = 5 %
(iii)
Return if, Year end price
$ 66
Return
($ 66 - $ 60)+ $ 3
$ 60
Return = 15 %
If inflation rate is 4 % , the price at year end gets incresed by 4 %
(i)
Return if, Year end price
$ 57
Return
($ 57*1.04 - $ 60)+ $ 3
$ 60
Return = 3.80 %
(ii)
Return if, Year end price
$ 60
Return
($ 60*1.04 - $ 60)+ $ 3
$ 60
Return = 9 %
(iii)
Return if, Year end price
$ 66
Return
($ 66*1.04 - $ 60)+ $ 3
$ 60
Return = 19.40 %
Price at Beginning
$ 60
No. of Shares
100
Dividend
$ 3
(i)
Return if, Year end price
$ 57
Return
($ 57 - $ 60)+ $ 3
$ 60
Return = 0
(ii)
Return if, Year end price
$ 60
Return
($ 60 - $ 60)+ $ 3
$ 60
Return = 5 %
(iii)
Return if, Year end price
$ 66
Return
($ 66 - $ 60)+ $ 3
$ 60
Return = 15 %
If inflation rate is 4 % , the price at year end gets incresed by 4 %
(i)
Return if, Year end price
$ 57
Return
($ 57*1.04 - $ 60)+ $ 3
$ 60
Return = 3.80 %
(ii)
Return if, Year end price
$ 60
Return
($ 60*1.04 - $ 60)+ $ 3
$ 60
Return = 9 %
(iii)
Return if, Year end price
$ 66
Return
($ 66*1.04 - $ 60)+ $ 3
$ 60
Return = 19.40 %
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