Question

In: Finance

An investor bought a stock for $85 and sold it exactly 2 years later for $98....

An investor bought a stock for $85 and sold it exactly 2 years later for $98. He received two dividend payments of $3 each during his holding period (the first at the end of the first year and the second, just before he sold his shares). The re-investment rate was 5% per year. Calculate the following:

The investor's capital gain: $

The future value of his reinvested dividends: $

The investor’s annual realized rate of return(ROR):

Expert Solution

Investor's Captial Gain = Increase in price of stock

Investor's Captial Gain = Selling price - purchase price

Investor's Captial Gain = $98 - $85

Investor's Captial Gain = $13

Future Value of his reinvested dividends (that is, Value of dividends at the end of year 2):

Future value of year 1 dividend at the end of year 2 = Year 1 Dividend x (1+reinvestment rate)

Future value of year 1 dividend at the end of year 2 = $3 x (1+5%)

Future value of year 1 dividend at the end of year 2 = $3.15

Value of year 2 dividend at the end of year 2 = $3

Therefore future value of his reinvested dividends = $3.15 + $3

Therefore future value of his reinvested dividends = $6.15

The investor’s annual realized rate of return(ROR):

Therefore, future value of investment = value of shares at the end of year 2 + future value of his reinvested dividends

Therefore, future value of investment = 98 + 6.15

Therefore, future value of investment = $104.15

Let rate of return be i

Future Value = Present Value x (1+i)n

104.15 = 85 x (1+i)2

(104.15 / 85)(1/2) -1 = i

Therefore i = 1.225294(1/2) - 1

Therefore i = 1.10693 - 1

Therefore i = 0.10693 = 10.693%

jeff jeffy answered 1 year ago

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