Question

We have the following information on the shares prices of Papa Smirph Corporation over the last five years. Calculate the total dollar return and percentage return on each share.

Year	Papa Smirph share price	Annual dividend per share
1	$20	$1.50
2	$25	$1.50
3	$22	$1.50
4	$30	$1.60
5	$32	$1.60

Select one:

a. $12; 60%

b. $19.7; 61.6%

c. $19.7; 98.5%

d. $12; 38.5%

e. $3.94; 15.3%

Given the following share price history, what is the arithmetic average return per share?

Year	Share price
1	$22
2	$26
3	$30
4	$28
5	$25

Select one:

a. 13.64%

b. 4.05%

c. 3.24%

d. 5.36%

e. 32.75%

Given the following share price and Consumer Price Index history, what is the average real return per share?

Year	Share price	Consumer Price Index
1	$35	100
2	$30	102
3	$39	104
4	$42	106
5	$45	108

Select one:

a. 12.59%

b. 4.49%

c. 3.55%

d. 5.16%

e. 5.59%

Answer 1

Here is the table of stock price & dividend distribution

Year	Papa smirph share price	Annual dividend share price
1	$20	$1.50
2	$25	$1.50
3	$22	$1.50
4	$30	$1.60
5	$32	$1.60

First question –

Total dollar return & percentage return ?

Total dollar return = here we can see that first year stock price is $20 & 5^th year stock price is $ 32 , if we have invested in first year then we would have been the return on last year

= $32 (fifth year stock price ) - $ $ 20 ( first year stock price )

= $ 12

Now we add the dividend distributed on 5 year duration

= $ 1.50 + $ 1.50 + $1.50 + $ 1.60 + $ 1.60

= $ 7.70

Now we have total return = stock return + dividend return

                                             = $12 + $ 7.70

         Ans =         Total dollar return = $ 19.70

Now we calculate percentage return =

            Formula = return / invested amount * 100

                           = $ 19.70 / $20 * 100

           Ans =                  = 98.5 % ( percentage return )

2) now we have to calculate arithmetic average return per share

here is the table

year	share price
1	$ 22
2	$26
3	$30
4	$28
5	$25

Here we don’t have clarity on number of share we have bought I suppose we have only one share,now the return would be

Return = share price on last year – share price on the first year / share price on first year

      = $25- $ 22/ $ 22 *100

     =        13.64 & we have supposed that we have only 1 share then final average return per share would be = return / number shares we bought out

= 13.64 % / 1

Ans = 13.64 %

3) Now we have to calculate average real return per share?

year	share price	consumer price index
1	$35	100
2	$30	102
3	$39	104
4	$42	106
5	$45	108

Formula to calculate inflation from the consumer price index

= ending CPI – beginning CPI / beginning CPI *100

Now put the values into the formulas from the given table –

For the first year = 102-100/100

2%

Inflation for the second year =

1.96%

Inflation for the third year=

= 106-104/104 *100

1.92%

Infalation for the last year =

108-106/106 *100

1.90 %

Now we calculate the return on each year

First year return = second year share price – previous year share price / previous year share price

= 30-35/35 * 100

= - 14.28 %

As above we will calculate return on next years

Second year return =

39-30/ 30 *100

= 30 %

Third year return =

=42-39/39 * 100

=7.77 %

Last year return = 45-42 /42 *100

= 7.14 %

Now calculate real return on each year from subtracting the corresponding inflation rate

Total return = ( absolute return in % - inflation in % )

= (-14.28- 2%)   + (30% - 1.96)+ (7.77 %-1.92%) + (7.14 % - 1.90%)

= - 16.28 + 28.04 + 5.85 + 5.24

= 22.85 %

We have invested amount for 5 years then we divide return into number of years

= 22.85 / 5

= 4.5 %

Ans = 4.49 ( approx. as given in option )