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The stock of Business Adventures sells for $60 a share. Its likely dividend payout and end-of-year...

The stock of Business Adventures sells for $60 a share. Its likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows:

  

Dividend Stock price
  Boom $2.00     $73      
  Normal economy 1.50     63      
  Recession 0.70     59      

Calculate the expected holding-period return. All three scenarios are equally likely. (Do not round intermediate calculations. Round your answer to 4 decimal places)

Expected return?

Use 0.01 Instead of 1%

Solutions

Expert Solution

  Boom holding period return=(73+2)/60-1=25%

Normal holding period return=(63+1.50)/60-1=7.5%

Recession holding period return=(59+0.70)/60-1=-0.5%

Calculate the expected holding-period return=(1/3)*25%+(1/3)*7.5%+(1/3)*(-0.5%)=0.1067 or 10.67%

jeff jeffy answered 2 years ago
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