Suppose that you bought IBM 5 years ago at a price of $128 per share. The price

Question

Suppose that you bought IBM 5 years ago at a price of $128 per share. The price has increased to $150...

a.) What is Standard Return for IBM's Stock over the entire 5 year period assuming IBM paid no

dividends over the 5 years?

b.) What is the Log Return for IBM's stock over the entire 5 year period assuming IBM paid no

dividends over the 5 years?

c.) What is Standard Return for IBM's Stock over the entire 5 year period assuming IBM paid $2.50 in

dividends in each of the 5 years?

d.) What is the Log Return for IBM's stock over the entire 5 year period assuming IBM paid $2.50 in

dividends in each of the 5 years?

e.) What impact did dividends have on IBM's calculated returns?

f.) Find the annually-compounded year-by-year return for parts a-d

Explanation / Answer

a.) What is Standard Return for IBM's Stock over the entire 5 year period assuming IBM paid no dividends over the 5 years? ans) Bought Price of the share = $128 Per share Present price of the share = $150 Per share Return on share = $22 (150-128) Standard Return for IBM for 5 years 22/128*100 17.1875 b.) What is the Log Return for IBM's stock over the entire 5 year period assuming IBM paid no dividends over the 5 years? = Standard Return for IBM's Stock = 22/128*100 Compund interst factor for 5 years at rate of 3.5% = 1.188 152.064 (128*1.188) 3.5 Compund interst factor for 5 years at rate of 3.0% = 1.159 148.352 (128*1.159) 3 Different Amount 3.712 0.5 Required rate of the return = (152.064-150) 2.064 Required rate of the return = 2.064/3.712*0.5 = 0.278017241 Then total return per year = 3.278 % Per year C) What is Standard Return for IBM's Stock over the entire 5 year period assuming IBM paid $2.50 in Bought Price of the share = $128 Per share Present price of the share = $150 Per share Return on share = $22 (150-128) Add Dividend in shares 12.5 Total Return $35 Standard Return for IBM for 5 years 35/128*100 27.34375 Per Year d.) What is the Log Return for IBM's stock over the entire 5 year period assuming IBM paid $2.50 in dividends in each of the 5 years? Total Return Compund interst factor for 5 years at rate of 7% = 1.403 179.584 (128*1.1.403) Compund interst factor for 5 years at rate of 8% = 1.469 188.032 (128*1.469) Different Amount 8.448 Requred rate of the return (185-179.584) 5.416 Total Return   = 7+ 5.416/8.448*1 Total Return   = 7+ 0.641098485 Total Return   = 7.64 % per year e.) What impact did dividends have on IBM's calculated returns? Ans) We are getting the more return if the company is paying dividend per year $2.5 f.) Find the annually-compounded year-by-year return for parts a-d Ans) Plesae refer a,b,c and d

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