Chapter 7, Problem 2PROB

Summary Introduction

A stock worth $950 was purchased one year earlier which is now trading at $988. During the last year a dividend of $47.50 was received.

Stock’s rate of return is the total return which the investors are getting, considering both the dividends received and capital appreciation. Dividend yield plus capital gains yield is the rate of return which the investors get on selling the stock.

Dividend yield is calculated as the expected dividend for a year divided by the price of the stock at the beginning of the period.

$\begin{array}{l}\text{Dividend yield }=\widehat{\frac{{\text{D}}_1}{{\text{P}}_0}}\\ where,\\ \widehat{{\text{D}}_1}=\text{Next expected dividend}\\ {\text{P}}_0=\text{ Price of the stock at the beginning of the period }\end{array}$

Capital gains yield is the change in stock value represented as a percentage change.

$\begin{array}{l}\text{Capital Gain yield}=\frac{\widehat{P_1}-P_0}{P_0}\\ where,\\ \widehat{P_1}=\text{Price of the stock at the end of the period}\\ {\text{P}}_0=\text{ Price of the stock at the beginning of the period}\end{array}$

Rate of return on the stock is the sum of the dividend yield and capital gains yield.

${\text{Rate of return(r}}_s\text{)=}\widehat{\frac{D_1}{P_0}}+\frac{\left(\widehat{P_1}-P_0\right)}{P_0}$