pnaniechambers 9 PM CST h12 Financial Planning Exercise 1 Question 1 ofS Check M
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pnaniechambers 9 PM CST h12 Financial Planning Exercise 1 Question 1 ofS Check My Work eBook Chapter 12 Financial Planning Exercise 1 Ranking investments by expected returns What makes for a good investment? Use the approximate yield formula or a financial calculator to rank the following investments according to their expected returns. Round the answers to two decimal places. Do not round intermediate calculations. a. Buy a stock for $50 a share, hold it for 3 years, then sell it for $80 a share (the stock pays annual dividends of $3 a share). 18.40 % b. Buy a security for $25, hold it for 2 years, then sell t for $65 (current income on this security is zero). Do not round intermediate calculations. 17.02 % c. Buy a 1-year, 10 percent note for $940 (assume that the note has a $1,000 par value and that it will be held to matunity). Do not round intermediate calculations. 17.02 % w 8 7 8 9 0 6Explanation / Answer
a.
Annual Rate of return = ($80 / $50) ^ (1 / 3) - 1
= (1.60 ^ 0.33) - 1
= 1.1696 - 1
= 16.96%
Rate of return on three year investment is 16.96%.
b.
Annual Rate of return = ($65 / $25) ^ (1 / 2) - 1
= (2.60 ^ 0.50) - 1
= 1.6125 - 1
= 61.25%
Rate of return on two year investment is 61.25%.
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